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Should Cities Diversify ? City Risk and Industrial Policy

Author

Listed:
  • Matthieu Bouvard

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Adolfo de Motta

    (McGill University = Université McGill [Montréal, Canada])

  • Sheridan Titman

    (University of Texas at Austin [Austin])

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 ineÿcient. 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.

Suggested Citation

  • Matthieu Bouvard & Adolfo de Motta & Sheridan Titman, 2024. "Should Cities Diversify ? City Risk and Industrial Policy," Working Papers hal-04784933, HAL.
    • Handle: RePEc:hal:wpaper:hal-04784933
    Note: View the original document on HAL open archive server: https://hal.science/hal-04784933v1
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