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Spatial allocation of capital: The role of risk preferences

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  • Broll, Udo
  • Roldán-Ponce, Antonio
  • Wahl, Jack E.
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    Abstract

    This paper considers a model of spatial allocation of investment capital under uncertainty. We demonstrate that the spatial concentration of economic activity depends upon properties of risk preferences deeper than risk aversion. The degree of so-called relative prudence unambiguously decides whether or not the diversi cation of income risk favours the geographic dispersion of economic activity. In our framework we relate risk diversi cation with economic integration. Then there exists risk preferences so that spatial concentration of industry and capital is not a ected by the degree of economic integration or segmentation of the regions. We also study the impact of net return regressibility upon spatial allocation. --

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    Bibliographic Info

    Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 03/10.

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    Date of creation: 2010
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    Handle: RePEc:zbw:tuddps:0310

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    Keywords: spatial allocation; inter-regional disparity; risk aversion; prudence; regression;

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    1. Krugman, Paul R & Venables, Anthony J, 1995. "Globalization and the Inequality of Nations," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(4), pages 857-80, November.
    2. Geert Bekaert & Campbell R. Harvey & Christian Lundblad & Stephan Siegel, 2004. "Global Growth Opportunities and Market Integration," NBER Working Papers 10990, National Bureau of Economic Research, Inc.
    3. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, American Economic Association, vol. 77(3), pages 421-30, June.
    4. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, Econometric Society, vol. 61(3), pages 589-611, May.
    5. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, American Economic Association, vol. 65(5), pages 900-922, December.
    6. Diego Puga, 2002. "European regional policies in light of recent location theories," Journal of Economic Geography, Oxford University Press, Oxford University Press, vol. 2(4), pages 373-406, October.
    7. repec:fth:iniesr:430 is not listed on IDEAS
    8. Bernard Fingleton, 2008. "A Generalized Method of Moments Estimator for a Spatial Panel Model with an Endogenous Spatial Lag and Spatial Moving Average Errors," Spatial Economic Analysis, Taylor & Francis Journals, Taylor & Francis Journals, vol. 3(1), pages 27-44.
    9. Shu-hen Chiang, 2009. "The effects of industrial diversification on regional unemployment in Taiwan: is the portfolio theory applicable?," The Annals of Regional Science, Springer, Springer, vol. 43(4), pages 947-962, December.
    10. Steven Brakman & Harry Garretsen & Charles van Marrewijk, 2006. "Agglomeration and Aid," CESifo Working Paper Series 1750, CESifo Group Munich.
    11. Michael Pflüger & Jens Südekum, 2004. "Integration, Agglomeration and Welfare," Working Papers of the Research Group Heterogenous Labor, Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim 04-24, Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim.
    12. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 53-73, January.
    13. Broll, Udo & Wahl, Jack E. & Wong, Wing-Keung, 2006. "Elasticity of risk aversion and international trade," Economics Letters, Elsevier, Elsevier, vol. 92(1), pages 126-130, July.
    14. José Pedro Pontes, 2005. "Intermediate goods and the location of productive activity," The Annals of Regional Science, Springer, Springer, vol. 39(1), pages 11-24, 03.
    15. Steven Brakman & Harry Garretsen (ed.), 2008. "Foreign Direct Investment and the Multinational Enterprise," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262026457, December.
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