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Regional Economic Diversification and Efficiency: Baumol' s Likely Lower Confidence Limit Measure of Risk

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  • Deborah J. Harper

    (University of Saskatchewan)

  • Larry V. St. Louis

    (University of Saskatchewan)

Abstract

In this paper we argue that the appropriate concept of regional economic efficiency is Baumol's lower confidence limit criteria. This implies a substantially reduced subset of the usual Markowitz efficient frontier. We examine this proposition in the context of a tractable equilibrium model with a data set for the province of Saskatchewan. We conclude that the Baumol efficiency criteria suggest maintaining substantial levels of activity in the high-risk, but higher-return, resource sectors of the economy. The results suggest that the cost of stability could be high, in terms of per capita income, if this economy were to diversify too far from its resource-based comparative advantage.

Suggested Citation

  • Deborah J. Harper & Larry V. St. Louis, 1999. "Regional Economic Diversification and Efficiency: Baumol' s Likely Lower Confidence Limit Measure of Risk," The Review of Regional Studies, Southern Regional Science Association, vol. 29(2), pages 197-211, Fall.
    • Handle: RePEc:rre:publsh:v:29:y:1999:i:2:p:197-211
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    References listed on IDEAS

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    1. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-126, March.
    2. Bawa, Vijay S., 1978. "Safety-First, Stochastic Dominance, and Optimal Portfolio Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(2), pages 255-271, June.
    3. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 25(2), pages 65-86.
    4. Niles C. Schoening & Larry E. Sweeney, 1992. "Proactive Industrial Development Strategies And Portfolio Analysis," The Review of Regional Studies, Southern Regional Science Association, vol. 22(3), pages 227-238, Winter.
    5. William J. Baumol, 1963. "An Expected Gain-Confidence Limit Criterion for Portfolio Selection," Management Science, INFORMS, vol. 10(1), pages 174-182, October.
    6. Paul A. Samuelson, 1970. "The Fundamental Approximation Theorem of Portfolio Analysis in terms of Means, Variances and Higher Moments," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(4), pages 537-542.
    7. Evsey D. Domar & Richard A. Musgrave, 1944. "Proportional Income Taxation and Risk-Taking," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 58(3), pages 388-422.
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    Cited by:

    1. Smith, Stephen M. & Miller, Kathleen, 2001. "Successful Adjustment to Economic Restructuring in the Nonmetro Northeast: 1950-1990," The Review of Regional Studies, Southern Regional Science Association, vol. 31(2), pages 121-147, Fall.
    2. Harris, Thomas R. & Seung, Chang K. & Narayanan, Rangesan, 2001. "Targeting Economic Diversification: An Application of Target MOTAD Procedures," The Review of Regional Studies, Southern Regional Science Association, vol. 31(2), pages 197-215, Fall.

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