Jack of All Trades or a Master of One? Specialization, Trade, and Money
Economics Science Institute, Chapman University; WWZ, University of Basel
Robert R. Reed III
University of Kentucky - Gatton College of Business and Economics
Christopher J. Waller
University of Notre Dame - Department of Economics
International Economic Review, Vol. 44, pp. 1275-1294, November 2003
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.
Number of Pages in PDF File: 20Accepted Paper Series
Date posted: October 20, 2003
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