Exchange and Specialization as a Discovery Process

Abstract

In this paper we study the performance of an economic environment that can support specialization if the participants implement and develop some system of exchange. We define a closed economy in which the participants must discover the ability to exchange, implement it, and ascertain what they are comparatively advantaged in producing. Many people demonstrate the ability to find comparative advantage, capture gains from trade, and effectively choose production that is consistent with the choices of others. However, many do not become specialists, even though full efficiency can only be achieved if everyone does so. Near-full efficiency does occur bilaterally in these economies, typically because some individuals have entered a stable trading relationship with a specialist in the other good. Such pairing does not necessarily give impetus to the formation of other pairs, nor are pairs open to the inclusion of a third party. We explore various treatments to provide insight into the conditions that might foster the growth of specialization and exchange within this austere institutional framework. We find one treatment that achieves high levels of efficiency in half of the sessions.