Is the Division of Labor Limited by the Extent of the Market?: Evidence from Chemical Industry

34 Pages Posted: 10 Apr 2005

See all articles by Ashish Arora

Ashish Arora

Duke University - Fuqua School of Business; National Bureau of Economics Research; Duke Innovation & Entrepreneurship Initiative

William B. Vogt

RAND Corporation; National Bureau of Economic Research (NBER)

Ji Woong Yoon

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management; Kyung-Hee University

Abstract

Stigler (1951) formalized the Smithian notion that the division of labor is limited by the extent of the market. Bresnahan and Gambardella (1998) make an analytical distinction between two dimensions of market size - the breadth and depth of markets - in terms of the effects on the division of labor. They argue that broader, but not deeper, markets promote specialization and division of labor between firms. This paper develops an empirical specification of these ideas and tests it using data from the chemical plant construction industry. We develop a simple model of the make-buy decision regarding the engineering and construction of chemical plants. In an advance over the literature, we embed this model in a market equilibrium, and estimate the resulting structural model. Our results support the theory developed by Bresnahan and Gambardella that increases in the number of potential buyers (but not the average size of the buyer) encourages firm specialization and division of labor.

Keywords: Specialization, division of labor, market size, Adam Smith, Make-Buy

JEL Classification: L22, L65, B2

Suggested Citation

Arora, Ashish and Vogt, William B. and Yoon, Ji Woong, Is the Division of Labor Limited by the Extent of the Market?: Evidence from Chemical Industry. Available at SSRN: https://ssrn.com/abstract=687340 or http://dx.doi.org/10.2139/ssrn.687340

Ashish Arora (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

National Bureau of Economics Research

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Duke Innovation & Entrepreneurship Initiative ( email )

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William B. Vogt

RAND Corporation ( email )

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Santa Monica, CA 90407-2138
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Ji Woong Yoon

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States

Kyung-Hee University ( email )

Dongdaemun-ku
Seoul, Gyeonggi-Do 446-701
Korea, Republic of (South Korea)