The Division of Labor and the Allocation of Time

　　This paper develops a model with endogenous specialization and the tradeoff between economies of specialization and transaction costs to analyze the relationship between time allocation and the division of labor. We show that the level of division of labor, the extent of the market, the level of specialization, productivity, the time spent on consumption activities, the consumption diversity, and per capita real income increase concurrently as transaction efficiency is improved. Furthermore, we prove that a stronger for leisure could have a positive effect on productivity by promoting the development of division of labor if people have strong preference for diversified consumption.