The role of fixed factors in multi-sector neoclassical growth models



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My dissertation consists of three essays that examine the role of fixed factors in multi-sector neoclassical growth models, specifically the role of population density in causing the onset of industrialization. The first paper examines the question of why industrialization occurred first in China rather than England. Although industrialization first occurred in England, it is often thought that China, not England, was the world leader in technology at the time. Yet China did not industrialize until 150 years after England and nearly a century after less advanced European countries. This puzzle is examined in a two-sector model with competing agrarian and industrial production technologies. I find that when differences in population density across countries are accounted for, this delayed industrialization by China is the result of decreasing returns to population density in the agrarian technology and is consistent with the theory. In the second paper, the importance of total factor productivity (TFP) in causing industrialization is examined. TFP has long been thought to be the driving force behind industrialization. However, such an explanation cannot adequately account for the staggered timing of industrialization across countries. By accounting for differences in population density, a heterogeneity previously unexplored in the literature, I can account for 49-51 percent of the movement toward industrialization in the two sector overlapping generations model employed by Hansen and Prescott (2002). The third paper presents a sequential competitive equilibrium to solve an infinite horizon two-sector neoclassical growth mode where the two sectors are chosen to represent the agrarian and manufacturing sectors of the economy. In this framework, industrialization is seen to be the relaxing of the non-negativity constrain on the manufacturing sector. It is seen that every country possesses a critical population density upon which it will transition from using solely an agrarian production technology to employing both agrarian and manufacturing technologies. This transition is result of a discrete change in the decision to invest in manufacturing capital. Furthermore, the ability of agents to anticipate industrialization is shown to increase the rate of capital accumulation and hasten the onset of the manufacturing sector.