DP9069 Market Size, Division of Labor, and Firm Productivity
|Author(s):||Thomas Chaney, Ralph Ossa|
|Publication Date:||July 2012|
|Keyword(s):||Division of labor, Firm productivity, Market size, Technology transfer|
|JEL(s):||F10, F12, L22, L25|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9069|
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.