COSTLY STRUCTURAL-CHANGE AND OPTIMAL-GROWTH

This paper studies the optimal growth of a developing economy that has a choice to expend a fixed amount of resource for a structural change that advances its production technology. It is shown that structural change is undertaken if capital stock is above a critical level. Economies undertaking structural change converge to a larger steady state and economies not undertaking structural change converge to a smaller steady state. The optimal policy correspondences and growth paths are characterized. The social optimum is shown implementable by a competitive equilibrium with lump-sum taxation.