Division of labor, coordination, and underemployment

In this paper, a general equilibrium model is constructed to investigate the concurrent movements in the number of traded goods, structural underemployment, and real income. Departing from the neoclassical tradition of the dichotomy of consumption and production, individuals are assumed to be both consumers and producers. The equilibrium is characterized by the tradeoff between the economies of specialization and the market transaction costs incurred in market exchanges. Transaction is costly and its efficiency dependent on infrastructure and the collective marketing effort exerted by all participants. Coordination among participants would result in an optimal amount of marketing effort and correctly identify the most efficient economic structure. Failing to achieve the proper coordination would not only decrease real income in each economic structure, but also prevent the selection of the most efficient economic structure. These two unfavorable outcomes of coordination failure could result in two different types of underemployment. Ths story is related to the "Search costs" and the "Coordination failure" approaches in the New Keynesian Economics but goes beyond the existing literature by endogenizing the equilibrium economic structure.