Market Size, Division of Labor, and Firm Productivity

Résumé

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 fim 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.

Mots-clés

Market size; Division of labor; Firm productivity; Technology transfers;

Codes JEL

F10: General
F12: Models of Trade with Imperfect Competition and Scale Economies • Fragmentation
L22: Firm Organization and Market Structure
L25: Firm Performance: Size, Diversification, and Scope