Working Paper: CEPR ID: DP9069
Authors: Thomas Chaney; Ralph Ossa
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.
Keywords: division of labor; firm productivity; market size; technology transfer
JEL Codes: F10; F12; L22; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in market size (F61) | Deeper division of labor among specialized teams (M54) |
| Deeper division of labor among specialized teams (M54) | Increase in firm productivity (D21) |
| Increase in market size (F61) | Increase in firm productivity (D21) |
| Market size (L25) | Adoption of superior technologies (O33) |
| Adoption of superior technologies (O33) | Effective implementation of specialized production processes (L23) |