CID Working Paper No. 7

Specialization, Information, and Growth: A Sequential Equilibrium Analysis

Yew-Kwang Ng and Xiaokai Yang

March 1999

Abstract

Pricing costs and information problems are introduced into a framework with consumer-producers, economies of specialization, and transaction costs to predict the endogenous and concurrent evolution in division of labor and in the information of organization acquired by society. The concurrent evolution generates endogenous growth based on the tradeoff between gains from information about the efficient pattern of division of labor, which can be acquired via experiments with various patterns of division of labor, and experimentation costs, which relate to the costs in discovering prices. The concept of Walras sequential equilibrium is developed to analyze the social learning process which is featured with uncertainties of the direction of the evolution as well as a certain trend of the evolution.

Keywords: coevolution of specialization and information, adaptive decision, bounded rationality, sequential equilibrium, economic development

JEL codes: D23, D50, D90, O12

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