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Should Cities Diversify? City Risk and Industrial Policy

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  • Bouvard, Matthieu
  • de Motta, Adolfo
  • Titman, Sheridan

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

  • Bouvard, Matthieu & de Motta, Adolfo & Titman, Sheridan, 2024. "Should Cities Diversify? City Risk and Industrial Policy," TSE Working Papers 24-1538, Toulouse School of Economics (TSE).
  • Handle: RePEc:tse:wpaper:129348
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    References listed on IDEAS

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    Keywords

    City diversification; industrial policy; city risk; coordination failures;
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