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

Listed author(s):
  • Guangzhen Sun
  • Xiaokai Yang
  • Shuntian Yao

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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File URL: http://www.cid.harvard.edu/cidwp/pdf/016.pdf
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Paper provided by Center for International Development at Harvard University in its series CID Working Papers with number 16.

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Date of creation: Jun 1999
Handle: RePEc:wop:cidhav:16
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  1. Xiaokai Yang, 2006. "Development, Structural Changes And Urbanization," World Scientific Book Chapters,in: Inframarginal Contributions To Development Economics, chapter 7, pages 137-166 World Scientific Publishing Co. Pte. Ltd..
  2. Gary S. Becker & Kevin M. Murphy, 1994. "The Division of Labor, Coordination Costs, and Knowledge," NBER Chapters,in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition), pages 299-322 National Bureau of Economic Research, Inc.
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  6. Dutta, Bhaskar & Mutuswami, Suresh, 1997. "Stable Networks," Journal of Economic Theory, Elsevier, vol. 76(2), pages 322-344, October.
    • Dutta, Bhaskar & Mutuswami, Suresh, 1996. "Stable Networks," Working Papers 971, California Institute of Technology, Division of the Humanities and Social Sciences.
  7. 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.
  8. Xiaokai Yang & Jeff Borland, 2005. "A Microeconomic Mechanism For Economic Growth," World Scientific Book Chapters, in: An Inframarginal Approach To Trade Theory, chapter 18, pages 409-436 World Scientific Publishing Co. Pte. Ltd..
  9. 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.
  10. 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.
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  12. Xiaokai Yang & Yew-Kwang Ng, 2006. "Theory Of The Firm And Structure Of Residual Rights," World Scientific Book Chapters, in: Inframarginal Contributions To Development Economics, chapter 10, pages 231-258 World Scientific Publishing Co. Pte. Ltd..
  13. Sherwin Rosen, 2005. "Substitution And Division Of Labour," World Scientific Book Chapters, in: An Inframarginal Approach To Trade Theory, chapter 3, pages 29-51 World Scientific Publishing Co. Pte. Ltd..
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  17. repec:dau:papers:123456789/5640 is not listed on IDEAS
  18. Elyès Jouini, 1993. "General equilibrium with producers and brokers Existence and regularity," Post-Print halshs-00167137, HAL.
  19. Baumgardner, James R, 1988. "Physicians' Services and the Division of Labor across Local Markets," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 948-982, October.
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