Uneven Product Diversification: Explaining the Lag of Agricultural Economies

ABSTRACT This paper documents that agricultural sectors diversify less than other manufacturing activities. A simple model shows that this difference can contribute to welfare divergence in a way that is qualitatively different to what results when uneven growth happens in the intensive margin. When consumers have love of variety, they endogenously reduce their expenditure share on the sector that diversifies production the least, pushing terms of trade against the lagging economy. Empirical evidence supports these patterns in agricultural economies. Uneven product diversification plays a relevant quantitative role in explaining expenditure share shifts and terms of trade movements, which complements existing explanations.