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Sectoral Diversification as Insurance against Economic Instability


  • Jan Kluge


This paper examines the extent to which sectoral diversification can act as an insurance mechanism against fluctuations in regional gross value added growth rates. I apply portfolio theory to the growth-instability properties of German districts. Furthermore, I define a comprehensive diversification measure and use Stochastic Frontier Analysis in order to estimate whether diversification allows regions to achieve more efficient growth-instability combinations, i.e., greater stability at given levels of economic growth. The results confirm that diversification does generate such effects. Spatial interactions do also play a role: The effects are less pronounced for regions whose economic performance is mainly driven by the surrounding regions.

Suggested Citation

  • Jan Kluge, 2015. "Sectoral Diversification as Insurance against Economic Instability," ifo Working Paper Series 206, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
  • Handle: RePEc:ces:ifowps:_206

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    References listed on IDEAS

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    Cited by:

    1. Jan Kluge, 2018. "Eine diversifizierte Wirtschaft als Versicherung gegen Krisen," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 25(05), pages 21-26, October.
    2. Marina Malkina, 2019. "How Change in Industry Mix Can Improve the Financial Performance of Regional Economies: Evidence from the Portfolio Approach," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 67(6), pages 1561-1575.
    3. Marina Yurievna Malkina, 2018. "Instability of Financial Return of Regional Economies and Its Determinants," Spatial Economics=Prostranstvennaya Ekonomika, Economic Research Institute, Far Eastern Branch, Russian Academy of Sciences (Khabarovsk, Russia), issue 3, pages 88-114.
    4. Kurt A. Hafner, 2016. "Regional industrial diversification: evidence from German gross value added
      [Regionale Diversifizierung der Branchenstruktur: Empirische Evidenz aus der Bruttowertschöpfung in den Ländern der Bunde
      ," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 36(2), pages 169-193, October.

    More about this item


    Sectoral diversification; regional growth; economic instability.;

    JEL classification:

    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy


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