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Division of Labor Transaction Cost, Emergence of the Firm and Firm Size

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Author Info

  • Yang, X.
  • Liu, P.W.

Abstract

In this paper a general equilibrium model is constructed to explain the emergence of firms and change in firm size by the tradeoff between economies of specialization and transaction cost. We show that firms emerge from the development of division of labor if the transaction efficiency for labor is smaller than that for intermediate goods. Given the emergence of firms, change in the average size of firms (average employment) will depend on the change in transaction efficiency for intermediate goods relative to that for labor. If the transaction efficiency is improved in such a way that the transaction efficiency for intermediate goods becomes higher than that for labor, average employment will decrease. We present evidence showing that it is not uncommon that average employment declines as the economy develops. The general equilibrium model provides an explanation for the concurrent increase of productivity and decrease in average employment which is observed in a number of countries. Models based on economies of scale instead of economies of specialization would have yielded the opposite prediction.

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Bibliographic Info

Paper provided by Chicago - Graduate School of Business in its series Papers with number 10.

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Length: 22 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:fth:chicbu:10

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Postal: UNIVERSITY OF CHICAGO, H.G.B. ALEXANDER FOUNDATION GRADUATE SCHOOL OF BUSINESS, CHICAGO ILLINOIS 60637 U.S.A.
Web page: http://gsb.uchicago.edu/
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Keywords: DIVISION OF LABOUR ; ENTERPRISES;

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References

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  1. Young, Allyn A., 1928. "Increasing Returns and Economic Progress," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 38, pages 527-542.
  2. Kim, Sunwoong, 1989. "Labor Specialization and the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 692-705, June.
  3. Murakami, Naoki & Liu, Deqiang & Otsuka, Keijiro, 1996. "Market Reform, Division of Labor, and Increasing Advantage of Small-Scale Enterprises: The Case of the Machine Tool Industry in China," Journal of Comparative Economics, Elsevier, vol. 23(3), pages 256-277, December.
  4. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  5. Yang, Xiaokai & Ng, Yew-Kwang, 1995. "Theory of the firm and structure of residual rights," Journal of Economic Behavior & Organization, Elsevier, vol. 26(1), pages 107-128, January.
  6. Cheung, Steven N S, 1983. "The Contractual Nature of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 26(1), pages 1-21, April.
  7. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 59, pages 185.
  8. Jones, Charles I, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 495-525, May.
  9. Borland, Jeff & Yang, Xiaokai, 1995. "Specialization, Product Development, Evolution of the Institution of the Firm, and Economic Growth," Journal of Evolutionary Economics, Springer, vol. 5(1), pages 19-42, February.
  10. Paul Milgrom and John Roberts., 1987. "Bargaining and Influence Costs and the Organization of Economic Activity," Economics Working Papers 8731, University of California at Berkeley.
  11. Pak-wai, Liu, 1992. "Extent of the Market, Specialization, Transaction Efficiency and Firm Size in Hong Kong," Departmental Working Papers _020, Chinese University of Hong Kong, Department of Economics.
  12. Lewis, Tracy R & Sappington, David E M, 1991. "Technological Change and the Boundaries of the Firm," American Economic Review, American Economic Association, vol. 81(4), pages 887-900, September.
  13. Camacho, A., 1991. "Adaptation costs, coordination costs and optimal firm size," Journal of Economic Behavior & Organization, Elsevier, vol. 15(1), pages 137-149, January.
  14. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
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Cited by:
  1. Sachs, J.D. & Yang, X., 1999. "Graduate Spread of Market-Led Industrialization," Papers 11, Chicago - Graduate School of Business.

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