Policy Analysis in a Dynamic Model with Endogenous Specialization

Abstract

In recent years, there has been growing interest in studying the relationship between specialization and economic progress. This line of research, as exemplified in the pioneering work of Yang and Ng (1993), is a revival and formal extension of Adam Smith’s (1776) and Allyn Young’s (1928) proposition that increases in the division of labour will create economic growth. These studies develop a microeconomic framework that brings the analysis of economies of specialization, the division of labour and the structure of economic organization into the conventional general equilibrium paradigm. By integrating the consumption and production decisions, these models show that the endogenous evolution of the division of labour based on a tradeoff between economies of specialization and transaction costs may help explain a wide range of economic issues, from microeconomic, monetary to macroeconomic ones.

I am indebted to Xiaokai Yang for his generous and extremely helpful suggestions which have substantially improved the quality of this chapter. Helpful comments from Yew-Kwang Ng, Mei Wen, and the participants at the International Conference in honour of Professor Kenneth Arrow held at Monash University in September 1995 are also acknowledged. Needless to say, all remaining errors and ambiguities remain the author’s own responsibility.