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

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  • Guangzhen Sun
  • Xiaokai Yang
  • Shuntian Yao

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

  • Guangzhen Sun & Xiaokai Yang & Shuntian Yao, 1999. "Theoretical Foundation of Economic Development Based on Networking Decisions in the Competitive Market," CID Working Papers 16, Center for International Development at Harvard University.
  • Handle: RePEc:wop:cidhav:16
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    File URL: http://www.cid.harvard.edu/cidwp/pdf/016.pdf
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    References listed on IDEAS

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    1. repec:wsi:dltcxx:v:01:y:2005:i:01:n:s0219871105000049 is not listed on IDEAS
    2. repec:wsi:dltcxx:v:02:y:2006:i:01:n:s0219871106000263 is not listed on IDEAS
    3. 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.
    4. 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.
    5. repec:wsi:dltcxx:v:01:y:2006:i:02:n:s0219871106000111 is not listed on IDEAS
    6. 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

    Consumer-producer; General equilibrium; Increasing return to specialization; Large economies; Network of division of labor; Transaction cost;

    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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