Persistence of Dualism in a Closed Economy

The paper builds a two-sector general-equilibrium model, with one homogeneous and one differentiated good. The differentiated good has increasing returns to scale. Preferences are nonhomothetic with a hierarchy of wants. Income distribution is determined by the ownership of inputs and endogenous factor prices. The equilibrium properties are derived. Capital accumulation without any change in ownership pattern generates enclaves of prosperity, leaving large sections of the economy unaffected. The comparative static results are interpreted in the light of the experiences of closed, developing economies, like India.