AN EQUILIBRIUM-MODEL ENDOGENIZING THE EMERGENCE OF A DUAL STRUCTURE BETWEEN THE URBAN AND RURAL SECTORS

This paper presents a general equilibrium model which formalizes the t rade-off between economies of specialization and transaction costs. Th e comparative statics, based on corner solutions, indicate that the ge neral equilibrium will shift between several market structures as tran saction efficiency is improved. Introducing a differential in transact ion efficiency between the agricultural and manufacturing sectors, we derive the emergence of a city from the evolution of the division of l abor, which is driven by improvements in transaction efficiency. The d ivision of labor is necessary but not sufficient for the emergence of cities. A sufficiently high transaction efficiency will make a city em erge from a high level of division of labor between specialized manufa cturers. (C) 1994 Academic Press, Inc.