Should Cities Diversify? City Risk and Industrial Policy

62 Pages Posted: 3 Jun 2024

See all articles by Matthieu Bouvard

Matthieu Bouvard

Toulouse School of Economics, University Toulouse Capitole (TSM-Research)

Adolfo de Motta

McGill University - Desautels Faculty of Management

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: May 28, 2024

Abstract

We explore the diversification of an urban economy where the labor specialization choices of its residents determine the city's exposure to sectoral shocks. The presence of demand-driven externalities introduces the possibility of city-wide coordination failures. Residents, when making their specialization choices, do not account for the costs of these coordination failures, and as a result, the equilibrium level of diversification is inefficient. The optimal policies that address these externalities depend on the city's economic condition, with prosperous urban economies deriving a greater benefit from fostering diversification. Thus, the paper rationalizes the widespread industrial policies that in some cases promote diversifying, while in others, specializing a city's economy.

Keywords: City diversification, industrial policy, city risk, coordination failures

JEL Classification: R32, R31, L52

Suggested Citation

Bouvard, Matthieu and de Motta, Adolfo and Titman, Sheridan, Should Cities Diversify? City Risk and Industrial Policy (May 28, 2024). Available at SSRN: https://ssrn.com/abstract=4846481 or http://dx.doi.org/10.2139/ssrn.4846481

Matthieu Bouvard (Contact Author)

Toulouse School of Economics, University Toulouse Capitole (TSM-Research) ( email )

Toulouse
France

Adolfo De Motta

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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