Infrastructure and Evolution in Division of Labour

Mei Wen
Monash University
(This paper has been published in RDE. 1(2), 191-206)
April 1997

Abstract:

This paper studies the relationship between infrastructure expenditure and endogenous growth generated by spontaneous evolution of division of labour. It identifies the necessary condition for infrastructure expenditure to take place and its equilibrium time path. Dynamic equilibrium shows that the optimal infrastructure expenditure, the size of the market networks, and the level of division of labour increase concurrently. While infrastructure can promote the evolution of division of labour through reducing the unit transaction cost, the total transaction cost each consumer-producer incurs rises as the optimal income share of infrastructure expenditure increases with economic development.

Acknowledgement: I am very grateful to Yew-Kwang Ng, Xiaokai Yang, Ross Parish, and C. Cyrus Chu for their helpful comments, criticisms and suggestions. I am responsible for any remaining errors.

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