Division of Labor, Transaction Cost, Emergence of the Firm and Firm Size
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.
|Date of creation:||Apr 1999|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.cid.harvard.edu/cidwp/Email:
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- 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.
- 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.
- Camacho, A., 1991. "Adaptation costs, coordination costs and optimal firm size," Journal of Economic Behavior & Organization, Elsevier, vol. 15(1), pages 137-149, January.
- 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.
- 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.
- Milgrom, Paul & Roberts, John, 1987. "Bargaining and Influence Costs and the Organization of Economic Activity," Department of Economics, Working Paper Series qt32s7d4jv, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- 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.
- Oliver Hart & John Moore, 1988.
"Property Rights and the Nature of the Firm,"
495, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- 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.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:wop:cidhav:10. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)
If references are entirely missing, you can add them using this form.