Does Risk Shape Economies? Income Volatility and Structural Change

Fenicia Cossu, Alessio Moro and Andrea Mottola

No 20594, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Countries at similar levels of income can differ markedly in their sectoral composition. We show that income risk can account for part of these differences. In a multi-sector model with non-homothetic preferences, higher sectoral TFP volatility reduces the services share at a given level of GDP through a precautionary saving mechanism. Using U.S. time-series and household-level data, we find a negative and statistically significant relationship between several proxies for income risk and the services share. This relationship also holds for Latin American and Asian premature deindustrializers. We then build and calibrate a dynamic stochastic growth model of structural transformation and run a counterfactual in which we set early U.S. aggregate volatility to Great Moderation low levels. The counterfactual economy can explain about 17% of the services-share gap between the U.S. in 1879 and premature deindustrializers at comparable income levels.

Keywords: Strucural Change; Income volatility; Precautionary savings (search for similar items in EconPapers)
JEL-codes: E21 E30 L16 (search for similar items in EconPapers)
Date: 2025-08
New Economics Papers: this item is included in nep-rmg
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