Endogenous Transaction Costs and Division of Labour

Abstract

In the emerging literature of general equilibrium models of high development economics (see Fujita and Krugman, 1995 and Krugman and Venables, 1996) and in the growing literature of endogenous specialization (see Yang and Ng, 1998, for a recent survey and selected references), effects of transaction costs on the equilibrium network size of division of labour, the extent of the market, and productivity are explored by formulating a tradeoff between increasing returns and transaction costs. In these models, however, transaction costs are exogenous in the sense that they are not caused by conflicts of interest between players in the economic arena.