General Equilibria in Large Economies with Endogenous Structure of Division of Labor

In the paper we study a general equilibrium model with specialization and division of labor. The function of the market is not only to allocate resources for a given structure of division of labor, but also to coordinate all individuals' decisions in choosing their patterns of specialization in order to utilize positive network effects of division of labor net of transaction costs. We establish the equilibriuni existence theorem, the first and second welfare theorems, and the core equivalence for a family of general equilibrium models with both possible increasing returns and transaction costs. Using an analytical framework with consumer-producers, economies of specialization, and transaction costs, the spirit of the classical economics of the division of labor is resurrected in a modern body of mathematical formalism.