Working paper

Market Size, Division of Labor, and Firm Productivity

Thomas Chaney, and Ralph Ossa


We generalize Krugman's (1979) "new trade"model by allowing for an explicit production chain in which a range of tasks is performed sequentially by a number of specialized teams. We demonstrate that an increase in market size induces a deeper division of labor among these teams which leads to an increase in fim productivity. The paper can be thought of as a formalization of Smith's (1776) famous theorem that the division of labor is limited by the extent of the market. It also sheds light on how market size differences can limit the scope for international technology transfers.


Market size; Division of labor; Firm productivity; Technology transfers;

JEL codes

  • F10: General
  • F12: Models of Trade with Imperfect Competition and Scale Economies • Fragmentation
  • L22: Firm Organization and Market Structure
  • L25: Firm Performance: Size, Diversification, and Scope


Thomas Chaney, and Ralph Ossa, Market Size, Division of Labor, and Firm Productivity, July 2012.