Optimal Management of a Regional Income and Pollution Portfolio Page 2

Regional policy makers can react to structural changes and their economic consequences, but may also have the option to actively promote such changes in order to accomplish their policy goals. In the present analysis, the regional portfolio framework originally proposed by Conroy (1974) is applied to find the optimal regional industrial structure given the conflicting goals of industrial growth, risk minimization, and emissions prevention. Interindustry linkages are incorporated to the portfolio maximization problem by adding an income multiplier table derived from a quantity-adjusted dynamic general equilibrium model for the Chicago region. The results reveal that the inclusion of both interindustry linkages and emissions constraints notably reduces the potential for efficiency gains through industrial diversification. Furthermore, risk reduction through a more equal sectoral distribution is in conflict with pollution prevention efforts that aim at minimizing the shares of polluting sectors