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Theoretical Foundation of Econonic Development Based on Networking Decisions in the Competitive Market

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Author Info

  • Sun, G.
  • Yang, X.
  • Yao, S.

Abstract

In the paper, an analytical framework with both increasing returns and transaction costs is developed to investigate the general equilibrium with endogenous specialization and division of labor. In this framework, each individual's optimum decision in choosing her pattern of specialization is always a corner solution and general equilibrium network of division of labor is based on one of myriad combinations of corner solutions. We establish the existence and efficiency theorems of the general equilibrium for large economies. But for a finite economy, the general equilibrium may fail to exist. It is shown that the function of the market is not only to allocate resources for a given network structure of division of labor, but also to coordinate all individuals' decisions in choosing their patterns of specialization to utilize positive network effects of division of labor net of transaction costs. With the analytical framework, the spirit of classical mainstream economics can be resurrected in a modern body of mathematical formalism.

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Bibliographic Info

Paper provided by Chicago - Graduate School of Business in its series Papers with number 16.

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Length: 20 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:fth:chicbu:16

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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: CONSUMPTION ; GENERAL EQUILIBRIUM ; PRODUCERS;

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References

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  1. Gary S. Murphy Becker & Kevin M., 1992. "The Division of Labor, Coordination Costs, and Knowledge," University of Chicago - George G. Stigler Center for Study of Economy and State 79, Chicago - Center for Study of Economy and State.
  2. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
  3. Rosen, Sherwin, 1983. "Specialization and Human Capital," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 43-49, January.
  4. Yang, Xiaokai & Borland, Jeff, 1991. "A Microeconomic Mechanism for Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 460-82, June.
  5. Hahn, F H, 1971. "Equilibrium with Transaction Costs," Econometrica, Econometric Society, vol. 39(3), pages 417-39, May.
  6. 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.
  7. William Jaffe, 1977. "A Centenarian on a Bicentenarian: Leon Walras's Elements on Adam Smith's Wealth of Nations," Canadian Journal of Economics, Canadian Economics Association, vol. 10(1), pages 19-33, February.
  8. Dutta, Bhaskar & Mutuswami, Suresh, 1996. "Stable Networks," Working Papers 971, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Stigler, George J, 1976. "The Successes and Failures of Professor Smith," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1199-1213, December.
  10. Jouini, Elyes & Kallal, Hedi, 1993. "General equilibrium with producers and brokers : Existence and regularity," Economics Letters, Elsevier, vol. 41(3), pages 257-263.
  11. 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.
  12. Locay, Luis, 1990. "Economic Development and the Division of Production between Households and Markets," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 965-82, October.
  13. 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.
  14. Baumgardner, James R, 1988. "The Division of Labor, Local Markets, and Worker Organization," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 509-27, June.
  15. 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.
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Cited by:
  1. Cheng, Wenli & Yang, Xiaokai, 2004. "Inframarginal analysis of division of labor: A survey," Journal of Economic Behavior & Organization, Elsevier, vol. 55(2), pages 137-174, October.

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