Economic Development,International Trade,and Income Distribution

This paper applies the inframarginal analysis, which is a combination of marginal and total cost-benefit analysis, to investigate the relationship between division of labor, the extent of the market, productivity and inequality of income distribution. The model with transaction costs and exogenous and endogenous comparative advantages shows that as trading efficiency is improved the general equilibrium discontinuously jumps from autarky to partial division of labor with a dual structure, then to the complete division of labor where dual structure disappears. In this process different groups of individuals with different trading efficiency become involved in a certain level of division of labor at different stages of development. As the leading group becomes involved in a higher level of division of labor leaving others behind, a dual structure emerges and inequality increases. As latecomers catch up dual structure disappears and inequality declines. When the leader goes to an even higher level of specialization, dual structure occurs and inequality increases again. Inequality decreases again as the latecomers catch up. Hence, the equilibrium degree of inequality fluctuates in this development process. The relationship between inequality and productivity is neither monotonically positive nor monotonically negative. It might not be an inverted U-curve. The key driving force of economic development and trade is improvement in trading efficiency. Received January 8, 2002; revised version May 2, 2002 Published online: December 5, 2002     

A Ricardian Model with Endogenous Comparative Advantage and Endogenous Trade Policy Regimes

This paper develops a Ricardian model with transaction costs and endogenous and exogenous comparative advantages. It shows that the level of division of labour and trade increases as transaction conditions improve. It identifies the conditions for trade negotiations that result in zero tariff rates and the conditions for the coexistence of unilateral tariff protection and unilateral laissez faire policies. The model may explain the policy transformation of some European governments from Mercantilism to laissez faire in the 18th and 19th century and policy changes in developing countries from protection tariff to trade liberalization and tariff negotiation.     

Efficient moral hazard

This paper presents an infinite-horizon, discounted dynamic programming model of the endogenous opportunity costs of an agent’s effort that is allocated among an endogenous number of principals. An agent allocates effort between evaluating new principals and attending to current principals. Since each principal’s return is not maximized by the agent’s optimal allocation, moral hazard occurs in equilibrium. However, since the agent maximizes the total expected value of all undertaken projects, the agent’s allocation of effort is efficient. If the agent chooses a single principal, then moral hazard does not occur and the allocation is efficient. These results are contrary to the inefficient moral hazard results in bilateral principal-agent (P-A) and common agency (C-A) models.     

The Size of the Firm and Social Division of Labour

This paper develops a formal model with transaction costs and economies of specialisation to address the size of the firm and the level of social division of labour. It is shown that the increase of the level of social division of labour and the decline of firm size may concur, and that the size of the firm crucially depends on, among other things, the relative transaction efficiency of the labour market with that of the markets for intermediate products.     

Credit mismatch and breakdown

This paper studies the phenomenon of mismatch in a decentralized credit market where borrowers and lenders must engage in costly search to establish credit relationships. Our dynamic general equilibrium framework integrates incentive based informational frictions with a matching process highlighted by (i) borrowers' endogenous market entry and exit decision (entry frictions) and (ii) time and resource costs necessary to locate credit opportunities (search frictions). A key feature of the incentive compatible loan contract negotiated between borrowers and lenders is the interaction of informational frictions (in the form of moral hazard) with entry and search frictions. We find that the removal of entry barriers can eliminate incentive-based equilibrium credit rationing. More generally, entry and incentive frictions are important in understanding the extent of credit rationing and credit mismatch, while search and incentive frictions are important for understanding credit market breakdown.     

Endogenous, Efficient Long-Run Cyclical Unemployment, Endogenous Long-Run Growth, and Division of Labor

The paper uses a dynamic equilibrium model to explain the concurrence of economic growth and business cycles. Introducing durable goods into a model with ex-ante identical consumer–producers and economies of specialized learning-by-doing, the author shows that when job-shifting costs, economies of specialized learning-by-doing, and trading efficiency are sufficiently large, a dynamic equilibrium with business cycles and unemployment might be Pareto superior to noncyclical growth patterns. Long-run cyclical unemployment still exists when the credit market is imperfect. Extending the model into overlapping generations framework, the author shows that complete division of labor with business cycles would still occur in equilibrium.     

Agglomeration Economies,Division of Labour and the Urban Land‐rent Escalation: A General Equilibrium Analysis of Urbanisation

A general equilibrium model with increasing return to labour specialisation and economies of transaction agglomeration is developed to address the residential land‐rent escalation associated with the urbanisation process, which is in turn endogenised as a result of the evolution of the division of labour. The interplay among the geographical pattern of transactions, trading efficiency and the network size of the division of labour plays a crucial role in our story of urbanisation. We show that: as transaction conditions are improved, the equilibrium level of division of labour and individuals specialisation levels increase; the urban land‐rent increases absolutely as well as relative to that in the rural area, the relative per capita lot size of residence in the urban and rural areas decreases; the diversity of occupations in the urban area and the population share of urban residents increase; and the productivity of all goods and per capital real income increase.     

Occupational Choice and Dynamic Incentives

We study an overlapping generations version of the principal-agent problem, where incentive contracts are determined in general equilibrium. All individuals are workers when young, but have a choice between becoming entrepreneurs or remaining workers when old. Imperfections in the credit market give rise to rents in entrepreneurial activities involving capital. These rents motivate poor young agents to work hard and save to overcome the borrowing constraints. With a labour market that is subject to moral hazard, the increased effort raises social welfare. Policies that reduce credit market imperfections, or redistribute income, may reduce welfare by dampening this effect.     

THE DIVISION OF LABOR AND ROUNDABOUT PRODUCTION: ALLYN YOUNG REVISITED

Abstract.  This paper investigates Allyn Young's two important doctrines concerning the division of labor and roundabout production. First, apart from advancing the state of knowledge, the progressive division of labor that can occur within a given population encourages the adoption of more specialized, differentiated intermediate goods in the production process. Second, the level of division of labor and the extent of the market depend on each other. Using a general equilibrium model with increasing returns to specialization, economies of complementarity between intermediate goods, and transaction costs, we demonstrate that the level of division of labor and the number of intermediate goods increase concurrently as transaction conditions are improved.     

An Endogenous Growth Model of a Financially Repressed Small Open Economy

The paper develops a monetary endogenous growth model of a financially repressed small open economy, characterized by curb markets, capital mobility, transaction costs in domestic and foreign capital markets, and a flexible exchange rate system, to analyze the impact of financial liberalization – interest rate deregulation and lower multiple reserve requirements – on growth and inflation. When the model is calibrated to match world figures, we find that interest rate deregulation enhances growth and reduces inflation in steady-state. For relatively smaller transaction costs in the curb market, the above result is, however, reversed. Under such circumstances, lowering the transaction costs in the foreign capital market tends to restore the growth-enhancing (inflation-reducing) capabilities of interest rate deregulation. Lower reserve requirements, though, always ensures lower (higher) steady-state inflation (growth).     

Infrastructure and Evolution in Division of Labor

This paper studies the relationship between infrastructure expenditure and endogenous growth generated by spontaneous evolution of division of labor. It identifies the necessary condition for infrastructure expenditure to take place and its equilibrium time path. Dynamic equilibrium shows that the optimal infrastructure expenditure, the size of the market network, and the level of division of labor increase concurrently. While infrastructure can promote the evolution of division of labor through reducing the unit transaction cost, the total transaction cost each consumer-producer incurs rises as the optimal share of the infrastructure expenditure increases with economic development.     

Endogenous vs. exogenous comparative advantage and economies of specialization vs. economies of scale

This paper draws the distinctions between the concepts of endogenous and exogenous comparative advantages and between the concepts of economies of specialization and scale. A comparison between the equilibrium model endogenizing the degree of specialization and endogenous comparative advantages, neoclassical trade model with exogenous comparative advantages, and an extended Dixit-Stiglitz model with a tradeoff between economies of scale and transaction costs is used to explore the equilibrium implications of the distinctions.     

Endogenous market structures and contract theory: Delegation, principal-agent contracts, screening, franchising and tying

I study the role of unilateral strategic contracts for firms active in markets with price competition and endogenous entry. Traditional results change substantially when the market structure is endogenous rather than exogenous. They concern (1) contracts of managerial delegation to non-profit maximizers, (2) incentive principal-agent contracts in the presence of moral hazard on cost-reducing activities, (3) screening contracts in case of asymmetric information on the productivity of the managers, (4) vertical contracts of franchising in case of hold-up problems and (5) tying contracts by monopolists competing also in secondary markets. Firms use always these contracts to strengthen price competition and manage to obtain positive profits in spite of free entry.     

A Neo-Heckscher–Ohlin Model of Trade with Endogenous Production Patterns*

We propose a Neo-Heckscher–Ohlin (HO) model of trade that combines comparative endowment advantage, comparative technological advantage, international capital mobility and trade costs. Using an inframarginal approach, we produce a partition of the exogenous parameter space in a host of parameter value subsets that demarcate the various equilibrium patterns of production and trade. The results are startling! They suggest that production within the diversification cone – a key assumption of the Heckscher–Ohlin theory that is required for its core propositions (such as factor price equalisation) to hold – may only prevail on the razor's edge, or under exceptional circumstances. In addition, our findings nominate a mechanism by which improvements in transaction efficiency facilitate international trade thereby stimulating cross-country division of labour. Contrary to other generalisations of the Heckscher–Ohlin (such as the various derivatives of the Kemp–Jones model of trade), our model does not assume a purely Ricardian character: comparative endowment advantage may determine the pattern of trade even in the presence of opposing technological differences, as long as total factor productivity coefficients adjusted for transaction efficiency and factor intensity do not confer unambiguous comparative (technological) advantage. Still, ‘intensity-efficiency’-adjusted comparative technological advantage supersedes factor endowments in determining the flow of trade.     

ANARCHY AND AUTARKY: ENDOGENOUS PREDATION AS A BARRIER TO TRADE*

This article presents a general equilibrium two‐country Ricardian trade model with endogenous transactions costs that arise from individual utility‐maximizing allocation of labor to production and piracy. In the absence of institutions for risk sharing and coordination of defense, autarky obtains over most of the parameter space. When both trade and predation are supported in equilibrium, terms of trade effects can make security immiserizing. In that case, paradoxically, predation creates trade.     

The Economic Efficiency of Policy Reform and Partial Market Liberalization under Transaction Costs

The article presents an integrated analysis of the effects of domestic and trade policy reform on resource allocation and welfare under transaction costs. It develops a general multiagent, multicommodity model, where transaction costs are the costs of resources used in the exchange process. The influence of domestic and trade policy (including both price and quantity instruments) on distorted market equilibrium is analysed. Alternative concepts of distorted equilibrium are presented and investigated. They provide a basis for evaluating the effects of multilateral partial market liberalization on resource allocation and welfare under transaction costs. New conditions are derived under which multilateral policy reforms generate Pareto improvements.     

To Trade Or Not To Trade: Economies With A Variable Number Of Tradeables*

We present a general equilibrium model that encompasses the endogenous selection and shadow‐pricing of a set of tradeable commodities, with home‐based and social production activities. In the model, a market system is a set of costly social institutions which embody the trade and production technologies available in the economy. Our equilibrium concept describes the pricing of market institutions, thus pricing the tradeability of a commodity. We obtain the existence and the decentralization of Pareto‐efficient allocations. We discuss an example regarding the transition of a guild‐based economy into a market‐based economy.     

INSTITUTIONALIZED CORRUPTION AND PRIVILEGE IN CHINA'S SOCIALIST MARKET ECONOMY: A GENERAL EQUILIBRIUM ANALYSIS

Abstract.  This paper develops a general equilibrium model to consider the effects of corruption caused by institutionalized privilege on economic welfare, the network size of division of labour and productivity. First a Walrasian equilibrium in a market economy is computed; then we consider the effects on welfare when a privileged group is chosen to work as high-level administrators. Finally, we allow for explicit collusion between administrators by introducing an administrator's agent who acts in the interests of all the administrators. The model shows that in equilibrium (fixed point) the degree of corruption, the degree of division of labour and productivity are interdependent.     

AN EMPIRICAL STATIONARY EQUILIBRIUM SEARCH MODEL OF THE HOUSING MARKET*

This article specifies and estimates a computationally tractable stationary equilibrium model of the housing market. The model is rich and incorporates many of its unique features: buyers’ and sellers’ simultaneous search behavior, heterogeneity in their motivation to trade, transaction costs, a trading mechanism with posting prices and bargaining, and the availability of an exogenous advertising technology that induces endogenous matching. Estimation uses Maximum Likelihood methods and Multiple Listing Services data. The estimated model is used to simulate housing market outcomes when (a) the amount of information displayed on housing listings increases and (b) real estate agent’s commission rates change.     

Endogenous Comparative Advantage*

We develop a model of trade between identical countries. Workers endogenously acquire skills that are imperfectly observed by firms; therefore, firms use aggregate country investment as the prior when evaluating workers. This creates an informational externality interacting with general equilibrium effects on each country's skill premium. Asymmetric equilibria with comparative advantages exist even when there is a unique equilibrium under autarky. Symmetric, no‐trade equilibria can be unstable under free trade. Welfare effects are ambiguous: trade can be Pareto‐improving even if it leads to an equilibrium between rich and poor countries, with no special advantage regarding country size.