Division of Labour and Innovation with Indivisibilities: Lessons from A. Smith

We study division of labour, innovation, and economic growth in a world with indivisibilities. In order to increase the division of labour, more specialized, labour saving capital varieties must be invented, which can be done only subject to a minimum size requirement. Thus, the division of labour is limited by the size of the market. Furthermore, the division of labour has a major impact on labour productivity. Due to the minimum size requirement, producers want to charge nonlinear prices (two part tariffs). In the model we obtain interesting dynamics. Depending on the parameters our economy can grow unboundedly, can grow up to a certain (even very high) level and then stagnate, or can be stuck in a poverty trap.