Knowledge that Transforms

Recent work has shown that reputational arguments based on trigger strategies can sometimes be used to deal with the problem of time inconsistency in government policy.' This idea was exploited by Robert Barro and David Gordon (1983) in a model of inflation and by V. V. Chari and Patrick Kehoe (1988) in a model of capital taxation. Here it is shown that reputational arguments of this sort are widely applicable.2 A general policy model is developed, based on an economy that is stationary over time, contains identical households, and has no endogenous state variables. It is shown in general that the infinite-horizon version of this model has equilibria in trigger strategies that yield outcomes strictly better than those attainable as equilibria in the one-period model.

Scholars since Henry Thornton and Walter Bagehot have advised central banks to lend in a crisis to any deserving customer who is illiquid but solvent. Aid should be given quickly, visibly, in large amounts when necessary, temporarily, and comprehensively. The loans should not subsidize errors of judgement, disrupt long-term monetary policy goals, or promote moral hazard. They should restore confidence, prevent panic, and contain spillover. Today, students of the lender of last resort (LLR) also advise that recipients should be chosen equitably and aid be dispensed fairly (see my study with Elizabeth Plautz, 1988). The Federal Reserve, in executing its LLR responsibilities, accepts most of these precepts. Two departures were particularly evident in October 1987, however. First, the Fed prefers to lend to commercial banks and does not lend directly to just any type of organization. Second, it likes to operate behind closed doors. The possibility of further financial deregulation, particularly the union of commercial and investment banking, and the postcrash reform of the stock, options, and futures markets, raise the question whether the Federal Reserve's preferences can continue to be met.

Economists have long been concerned with educational policies, but, in this decade of educational reform proposals, economists have not made much effort to translate research into direct policy implications. This is particularly true with respect to federal government policies. This paper provides an overview of current federal involvement in education and considers what, if anything, research has to say about potential policy changes. At the outset I should make it clear that I believe that the general alarm about the state of our educational system is warranted. The educational system that produced so much of the wealth and opportunity for advancement in the United States in the past now faces serious problems. At the same time, I am quite skeptical about the efficacy of a much expanded federal role in education at this time.

Canadian data on strikes between 1946 and 1983 are used to estimate linear regression models for the logarithm of completed duration. A thorough investigation of the influence of the business cycle reveals strong support for the hypothesis that strike durations are countercyclical. The cyclical effect is shown to be robust to both the choice of cyclical variable and the econometric specification, and the magnitude of the effect is quite substantial. Experimentation with different representations of the cycle reveals that it is difficult to improve on a simple formulation involving a single continuous variable.

The standard model of monopolistic imperfect quality discrimination involving consumer self-selection has shown that no distortion occurs at the highest quality level, while all lower quality levels are degraded in order to maintain profitable market segmentation. This result flows from the assumption that consumers with a higher total utility of quality also have a higher marginal utility of quality. The paper develops a reasonable model in which the standard assumption is not satisfied, and this alternative model yields vastly different conclusions regarding the form of quality distortion. In particular, quality may be enhanced, not degraded, to maintain profitable market segmentation.