Jack of All Trades or a Master of One? Specialization, Trade, and Money

Gabriele Camera, Robert Reed () and Christopher Waller

International Economic Review, 2003, vol. 44, issue 4, 1275-1294

Abstract: We consider a model of decentralized exchange where individuals choose the set of goods they produce. Specialization involves producing a smaller set of goods and doing it more proficiently. In doing so, agents reduce production costs, but also reduce the ease of trading their output. We derive the equilibrium degree of specialization and examine how it is affected by underlying fundamentals. Due to the existence of a hold-up problem, individuals specialize too little relative to the social optimum. Introducing money leads to more specialization relative to barter and increases welfare. Copyright 2003 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Date: 2003
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