Toward a Unified Transaction Cost Theory of Economic Organization

This paper develops a general equilibrium model endogenizing labor specialization, firm size, firm specialization, interfirm trade, and economic fragmentation. In contrast to the standard neoinstitutionalist understanding of firms and markets as substitutes in organizing production, firms and markets are shown to be complements in reaping economies to the division of labor. As a result, firm size varies directly, rather than inversely, with the extent of interfirm trade. Growth is facilitated by increases in the complexity of economic organization, involving increases in the division of labor, the size and specialization of firms, market size, and the complexity of interfirm trade.