Structural Transformation, Sector Technologies and the Marginal Product of Capital

The most important result of our analysis is we that find significant departures from the sets of conditions that the previous literature has identified as capturing the key forces behind balanced growth. In particular, we find evidence that factor shares are not common across sectors and that at the sectoral level they are not constant over time. Moreover, at the sectoral level the elasticity of substitution between capital and labor is significantly different from one, and is therefore inconsistent with Cobb--Douglas production functions at the sectoral level. Lastly, we also find that marginal value products are not equalized across sectors. To be consistent with the condition that capital is efficiently allocated across sectors, we introduce an intratemporal adjustment cost of capital and unmeasured investments. Having uncovered the features of technology at the sectoral level, we then combine it with our existing results on preferences and ask whether this structure delivers (approximate) balanced growth at the aggregate level. We find that the answer is yes.