Abstract

In this study, we offer a financial economist’s view on the largest municipal bankruptcy in the U.S. history. While the city of Detroit’s financial insolvency has been examined by researchers from various fields and several factors are considered attributable to the event, we believe the center of all issues is merely the city’s lack of diversification strategy. This is evidenced by the deteriorating market share of the Big three, the dropping share of auto vehicles & parts manufacturing employment in Detroit, and the city’s long-term trend of declining population. While the auto industry did deliver Detroit a period of prosperity, this over-reliance on one industry inevitably brought financial difficulties on the city as the industry matures along with increased competitions.

This unfortunate outcome derived from a non-diversifying strategy is well predicted by the Portfolio theory. We believe with proper strategy of diversification, the city of Detroit could largely avoid its financial insolvency. The future of Detroit may well still cling to its determination to identify supporting industries and a well-developed economic plan.

 

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