Technical Note: An Eaton and Kortum (2002) Model of Urbanization and Structural Transformation

This technical note extends the model of Michaels et al. (2011) to introduce Eaton and Kortum (2002) heterogeneity within each sector, which facilitates a tractable analysis of bilateral transport costs. We show how the resulting model can be calibrated using data on employment by sector and location to determine productivity in each sector and location. We undertake this calibration for each year separately without imposing prior structure on the pattern of productivity growth over time. We show that the resulting calibrated productivities support the explanation for the stylized facts in Michaels et al. (2011) based on a combination of aggregate reallocation from agriculture to non-agriculture and di¤erences in mean reversion in productivity between the two sectors.