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

Deborah J. Harper and Larry St. Louis
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Deborah J. Harper: University of Saskatchewan

The Review of Regional Studies, 1999, vol. 29, issue 2, 197-211

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.

Date: 1999
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