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

Author

Listed:
  • 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.

Suggested Citation

  • Sun, G. & Yang, X. & Yao, S., 2000. "Theoretical Foundation of Econonic Development Based on Networking Decisions in the Competitive Market," Papers 16, Chicago - Graduate School of Business.
    • Handle: RePEc:fth:chicbu:16
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    Cited by:

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    2. Robert P. Gilles & Dimitrios Diamantaras, 2005. "New Classical Economics: Towards A New Paradigm For Economics?," Division of Labor & Transaction Costs (DLTC), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 35-56.
    3. Ke Li, 2006. "Division Of Labour, Specialization, And Theft Behavior — A General Equilibrium Analysis Of "Hobbes' Jungle"," Division of Labor & Transaction Costs (DLTC), World Scientific Publishing Co. Pte. Ltd., vol. 1(02), pages 163-184.
    4. Shuntian Yao, 2006. "Output Set, Convexity, Specialization And Trade In The Absence Of Comparative Advantages," Division of Labor & Transaction Costs (DLTC), World Scientific Publishing Co. Pte. Ltd., vol. 2(01), pages 15-35.
    5. Yanqing Jiang, 2016. "Trade integration and regional inequality: a theoretical framework with empirical implications for China," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 14(4), pages 365-384, October.
    6. Li, Ke, 2007. "Transaction cost, corporate governance and division of labor--A general equilibrium analysis of professional managers and its implication to China's practice," Research in International Business and Finance, Elsevier, vol. 21(3), pages 447-468, September.
    7. 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.
    8. Ke Li & Chihning Chu & Derfang Hung & Chauchyun Chang & Songlin Li, 2010. "Industrial Cluster, Network And Production Value Chain: A New Framework For Industrial Development Based On Specialization And Division Of Labour," Pacific Economic Review, Wiley Blackwell, vol. 15(5), pages 596-619, December.

    More about this item

    Keywords

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    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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