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Discussion Paper Details

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Title: Market Size, Division of Labor, and Firm Productivity

Author(s): Thomas Chaney and Ralph Ossa

Publication Date: July 2012

Keyword(s): Division of labor, Firm productivity, Market size and Technology transfer

Programme Area(s): International Trade and Regional Economics

Abstract: We generalize Krugman's (1979) 'new trade' model by allowing for an explicit production chain in which a range of tasks is performed sequentially by a number of specialized teams. We demonstrate that an increase in market size induces a deeper division of labor among these teams which leads to an increase in firm productivity. The paper can be thought of as a formalization of Smith's (1776) famous theorem that the division of labor is limited by the extent of the market. It also sheds light on how market size differences can limit the scope for international technology transfers.

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Bibliographic Reference

Chaney, T and Ossa, R. 2012. 'Market Size, Division of Labor, and Firm Productivity'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9069