A microeconomic approach to modeling the division of labor based on increasing returns to specialization

This dissertation is stimulated by the rethinking of trade theory led by Krugman, Helpman, and Ethier and by the rethinking of growth theory led by Schultz, Sah, Stiglitz, Lucas, and Romer. I develop a microeconomic approach to modeling the division of labor based on increasing returns to specialization by combining the rethinking above with the transaction-cost approach developed by Coase, Cheung, and Alchian. Such a combination may be meaningful for refining neoclassical microeconomics.;In the second chapter, I present a model to describe the division of labor based on increasing returns to specialization in the context of general equilibrium. I assume that there are increasing returns to specialization in production, labor is specific for an individual, and there are transaction costs. This model generates three results: (i) Competitive markets endogenously determine an equilibrium level of the division of labor. (iii) Equilibrium achieves a Pareto optimum even if the number of producers for each good in equilibrium may be small. (iii) Increasing transaction efficiency leads to greater division of labor, thereby higher productivity. Also, improved transaction efficiency induces changes in market structure.;In the third chapter, I develop a more general approach to handling the model with increasing returns to specialization and reconsider the theories of structural change and urbanization. In the fourth chapter, I build a dynamic model that generates economic growth based on the evolution of the division of labor.;In the fifth chapter, I extend the models in the previous chapters to formalize Coase, Alchian, and Cheung's ideas on the function of the firm in improving transaction efficiency. The relationships among the division of labor, economic growth, and the evolution of economic institutions are investigated.;This dissertation consists of five chapters. The first is an introduction. The second focuses on the rethinking of trade theory, the third and fourth focus on the rethinking of growth theory, and the fifth focuses on the theory of institutional development.;In this dissertation, I explore two functions of a free market system beside its function in allocating resources for a given market structure and a given institutional arrangement. The first of these functions is to search for the efficient market structure. The second is to search for the efficient institutional arrangements.