Directions for Diversification With an Application to Saskatchewan*

Traditional models of regional diversification do not capture the trade‐off between stability and living standards. In this paper, we characterize regions as open activity models subjected to both productivity and price shocks. We then partially rank small diversification policies by the direction in which they point away from the current industrial structure in mean‐variance space. Some general patterns emerge. In particular, diversification for regional self‐sufficiency and away from regional comparative advantage may be undesirable.