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Endogenous Specialisation and Endogenous Principal‐agent Relationship[Note 1. Thanks to Ken Arrow, Paul Milgrom, Yingyi Qian, the ...]
Author(s) -
Yang Xiaokai,
Yeh Yeongnan
Publication year - 2002
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/1467-8454.00147
Subject(s) - autarky , moral hazard , economics , microeconomics , transaction cost , competitive equilibrium , principal (computer security) , general equilibrium theory , production (economics) , incentive , market economy , welfare , computer science , operating system
The paper develops a general equilibrium model with endogenous principal‐agent relationship within a framework of consumer‐producer, economies of specialisation, and transaction costs. It is shown that if transaction efficiency is low, then autarky is chosen as the general equilibrium where no market and principal‐agent relationship exists. As transaction efficiency is improved, the equilibrium level of division of labour increases, comparative advantage between ex ante identical individuals emerges from the division of labour, and the number of principal‐agent relationships increases. The following features of the model distinguish it from other principal‐agent models in the literature. The principal‐agent relationships are not only endogenous, but also reciprocal between different specialists. In a general equilibrium environment, choice between pure pricing and contingent pricing is endogenised. In the paper, the implications of endogenous transaction costs caused by moral hazard for the equilibrium extent of the market and related degrees of market integration, production concentration, trade dependence, diversity of economic structure, and productivity are explored. The model predicts two interesting phenomena: a man might work harder for the market with moral hazard than working for himself in the absence of moral hazard; a market with moral hazard might be Pareto superior to autarky with no moral hazard.