DON'T PUT ALL YOUR EGGS ON ONE BASKET: THE LESSON FROM DETROIT'S BANKRUPTCY

Abstract

After struggled for nearly 50 years, the city of Detroit filed for Chapter 9 bankruptcy on 18 July, 2013 and emerged from court protection on 10 December, 2014 brining to a close the largest municipal bankruptcy in American history after 17 months. In this research, we argue that the failure of Detroit is collectively attributed to the lack of a well-thought industry strategy. We structure a conceptual framework relating a city's industry mix to the population growth and its human capital stock. The stock of human capital is not only an outcome of the industry strategy but it feeds back to the industry portfolio. By using a time series data, we show a significant impact of the market share of the Detroit Three on the employment of the traditional industries in the Detroit area. The education attainment of the adult population in Detroit suggests a stagnant trend since 2005. Our empirical evidence jointly implies that an un-diversified industry portfolio of a city not only intensifies the correlation between its economic fate with the fluctuation of the focused industry but it also generates barriers to upgrade its work force and as a result, rebalancing its industry mix becomes difficult.