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Growth, Stability, and the Urban Portfolio

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  • William Spelman

    (University of Texas at Austin)

Abstract

Local governments provide infrastructure improvements, guarantee loans, and offer tax incentives to lure new businesses and keep old ones. This is usually done with one objective in mind—maximizing economic growth. Application of investment portfolio theory to historic data on metropolitan growth rates suggests that there are clear costs to this strategy in the form of increased volatility in growth rates. In addition, most cities are economically inefficient in the sense that the volatility in growth rates is greater than it would be if their economies were better diversified. The extent of this inefficiency, referred to here as avoidable risk, is an effective performance measure for local economic development activities. Local officials should consider this measure and the objective of diversification when making economic development decisions.

Suggested Citation

  • William Spelman, 2006. "Growth, Stability, and the Urban Portfolio," Economic Development Quarterly, , vol. 20(4), pages 299-316, November.
    • Handle: RePEc:sae:ecdequ:v:20:y:2006:i:4:p:299-316
    DOI: 10.1177/0891242406291491
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    References listed on IDEAS

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    Cited by:

    1. Jan Kluge, 2018. "Sectoral diversification as insurance against economic instability," Journal of Regional Science, Wiley Blackwell, vol. 58(1), pages 204-223, January.
    2. Steven Deller & Philip Watson, 2016. "Spatial variations in the relationship between economic diversity and stability," Applied Economics Letters, Taylor & Francis Journals, vol. 23(7), pages 520-525, May.
    3. Watson, Philip & Deller, Steven, 2017. "Economic diversity, unemployment and the Great Recession," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 1-11.
    4. Pérez Odeh, Rodrigo & Watts, David & Flores, Yarela, 2018. "Planning in a changing environment: Applications of portfolio optimisation to deal with risk in the electricity sector," Renewable and Sustainable Energy Reviews, Elsevier, vol. 82(P3), pages 3808-3823.
    5. Steven Deller & Philip Watson, 2016. "Did Regional Economic Diversity Influence The Effects Of The Great Recession?," Economic Inquiry, Western Economic Association International, vol. 54(4), pages 1824-1838, October.

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