Should Cities Diversify ? City Risk and Industrial Policy

Matthieu Bouvard (), Adolfo de Motta and Sheridan Titman
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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]

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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.

Keywords: City diversification; Industrial policy; City risk; Coordination failures (search for similar items in EconPapers)
Date: 2024-11-15
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