Sectoral Diversification as Insurance against Economic Instability
Ifo Institute, Munich, 2015
Ifo Working Paper No. 206
![](https://www.ifo.de/DocImg/wp-2015-206-kluge-diversification-insurance.jpg?c=1689237196)
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.