Abstract

This paper analyzes the endogenous determination of sectors in a growing economy. It assumes that there are traditional sectors and modern sectors and economic growth is driven by rising productivity of the modern sectors. It also assumes that individuals are heterogeneous, which leads to increasing marginal opportunity costs in creating new modern sectors. We show that under these main assumptions, economic growth first increases diversification to sectors and then reduces it. We also show that for the equilibrium to be stable and well-behaved, it is required that the modern and traditional sectors should be substitutes and not complements.