Trade Induced Firm Productivity and Division of Labor in a General Equilibrium with Oligopoly

Keita Kamei

Economics Bulletin, 2017, vol. 37, issue 4, 2384-2393

Abstract: We construct a general equilibrium model with oligopoly that embeds Smith's (1776) famous theory of the division of labor under vertical specialization. Firms have to perform their sequential tasks in their product chain to produce the final good. To perform their tasks, firms optimally organize the teams and assign them tasks but they incur costs in performing this organizational work. If the number of teams increases, then firm productivity also improves. We show that, if the number of firms is exogenous, trade liberalization does not affect firm productivity. Meanwhile, if the number of firms is endogenous, trade liberalization improves firm productivity. This occurs because pro-competitive trade liberalization decreases the number of domestic firms. The surviving firms can then employ more labor and increase their productivity because, using new employment, they organize the new teams to promote a deeper division of labor in relation to their product lines.

Keywords: International Trade; Division of Labor; Firm Productivity; Cournot Competition; General Oligopolistic Equilibrium (GOLE) (search for similar items in EconPapers)
JEL-codes: D2 F1 (search for similar items in EconPapers)
Date: 2017-10-26
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