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.