This paper demonstrates several strengths and shortcomings of models of sectoral reallocation. Although these models demonstrate that sectoral reallocation can be an important amplification and propagation mechanism for exogenous shocks, they are essentially unable to explain any effects of sectoral reallocation on aggregate productivity or related quantities (such as the real wage or observations of aggregate increasing returns to scale), unless a wedge is introduced into the model that drives the marginal products of inputs in different sectors apart in steady state. In particular, costs of adjustment, lags to adjustment, and intermediate input linkages are not sufficient.This paper offers a solution to this shortcoming in the form of variable sectoral capital utilization, the marginal product of which can easily differ across sectors in steady state.
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