Knowledge that Transforms

and not from the explicit examination of substitutability between private and public provision of goods and services. If private and government investment expenditures are perfect substitutes (the limiting case) then increases in government investment goods purchases financed by additional debt creation reduces potential output because private net-of-deficit savings decline by more than the increase in government investment at the initial level of output. Since government debt is viewed as an addition to wealth there is a decline in the relative desire to accumulate capital goods, whether private or public. Thus, the observation that there may be a potential decrease in steady state output is not due to perfect (or any other degree of) substitutability between private and public expenditures but rather is due to a less than perfect symmetry to the wealth effects associated with tax and deficit financing. The introduction of less-thanperfect' expenditure substitutability mitigates against this revenue composition effect, as a one dollar increase in government investment goods would initially cause a less than one dollar decrease in private investment demand. In like fashion, von Furstenberg's assertion that the marginal propensity to save must be unity if fiscal actions are not to affect steady state output (p. 77) is correct only within the context of his particular private savings function. If future tax liabilities are perfectly discounted then the marginal propensity to save will be unity out of the obtained by the private sector from changes in the form of financing government expenditures. Thus, alluding to an observed savings rate of 8% in the United States does not constitute any substantive evidence about possible impacts on potential output of changes in government expenditures, as that average savings rate cannot be applied to marginal changes in disposable income when future tax liabilities are fully, or even partially, discounted.

E CONOMISTS have long recognized the desirable qualities of a competitive market. The milk industry, although it might appear to be a prototype competitive market, is far from competitive. This is due in part to locational factors and in part to a vast network of federal and state governmental regulations and controls. Over 95% of raw milk sales to processing plants are regulated, and in 1972 about a quarter of all wholesale and retail sales of fluid milk products, the concern of this paper, were regulated (USDA, 1972). As a result of increased interest in regulation in general, economists have become increasingly concerned with milk regulation. I Furthermore, some states have recently dropped wholesale and retail price regulation. The implications of these various government controls are important to both consumers and public policy makers. Some studies have found that state retail price regulation leads to higher prices.2 Economic theory also predicts that insulation from price competition may have significant effects on the number of participants and the efficiency of production in an industry. The previous studies have failed to consider the structural implications of wholesale and retail price regulation. This paper notes the announced and implied objectives of state retail fluid milk price regulation. Application of the Chamberlinian monopolistic competition model will aid in heuristically contrasting unregulated and regulated equilibria. Empirically, a simultaneous equations model will be used to study the effects of regulation upon both the performance and structure of the fluid milk industry. Further, an estimate of the social cost of regulation will be deduced from the empirical results. Finally, the implications for public policy will be presented.

7 The F-statistic for the first test is F(4,107) = 0.50 while for the second test it is F(4,11 1) = 0.81. Both of these values are well below the critical-F at conventional levels of significance. 8 Further experimentation showed that one additional parameter could be eliminated by, for example, disposing of the last join point (setting d2 = 0.). However, since the purpose here was simply to show that fewer than 12 parameters are required, the equation has been left in the present form.

In recent article in this REVIEW, Howard Newman presents evidence that a complex structure of strategic groups implies competitive performance in an (1978, p. 418). Newman's evidence is necessarily limited to small sample of 34 'chemical industries because classifying an industry as homogeneous or heterogeneous with respect to its leading firms' strategies and structures is extremely time-consuming. Fortunately, Stephen Rhoades' studies of the effect of diversification on industry profits support Newman's major hypotheses for large samples of diverse manufacturing industries. Rhoades reasoned that diversification is barrier to entry because it makes predatory pricing likely and because consolidated financial reporting obscures the excess profits that normally attract entry. Therefore, Rhoades was surprised to find out that when an industry is secondary or non-primary activity for substantial portion of firms in the industry, industry margins tend to be relatively low (1973, p. 152). But this result is consistent with Newman's argument that intra-industry diversity results in more rivalrous conduct and thus competitive performance. Newman's theoretical insight explains an apparent inconsistency in Rhoades' empirical findings, and Rhoades' empirical work provides evidence that Newman's hypotheses are not peculiar to chemical process industries.

The strength of the relationship between schooling and the logarithm of earnings at different levels of experience can be measured by coefficients of determination or by residual variances. For tracking unobserved post-school investments in cross-sections, the latter are clearly preferable; the greater reliance on the former in the literature is misplaced. If the fraction of earning capacity devoted to postschool investment is uncorrelated with earning capacity at school-leaving, the relationship between schooling and the logarithm of earnings should be strongest at overtaking, which would plausibly be placed in the first decade of work experience. Mincer reported coefficients of determination which followed this pattern, at least for full-year workers. An analysis of more recent data failed to detect this pattern for coefficients of determination, but found more favorable evidence for residual variances using weekly (but not hourly)

THE Federal Home Loan Bank Board (FHLBB), a government regulatory agency for member Savings and Loan Associations (SLA), provides advance loans (advances) to members. Advances are considered a major policy tool for the FHLBB in stabilizing deposit, mortgage, and housing markets. Indeed, the FHLBB has characterized advances as providing 'a central credit resource, capable of expanding and contracting to meet the needs of its member institutions for housing credit.' Debt issues in the government agency capital market are the primary source for FHLBB funds.2 The quantity of advances outstanding has grown from $5.3 billion at year-end 1968 to $32.7 billion at year-end 1978, and with considerable variation in between. A key issue in evaluating the role of advances has been whether or not the FHLBB uses nonprice rationing in allocating advance loans. Without nonprice rationing, the FHLBB sets the interest charge for the advances and member SLAs determine the quantity of loans they wish to borrow. In this case, an appraisal of FHLBB policy is relatively straightforward and can be based on the level of the advances rate. With nonprice rationing, in contrast, an appraisal of FHLBB policy is more complicated because the unobserved availability of advances must also be considered. The relevance of this issue is underscored by a recent report of the existence of nonprice rationing.3 Existing econometric models of the advances market treat the question of nonprice rationing in different ways. Hendershott (1977) has the quantity of advances determined by SLA demand without regard to interest rates, so there is neither price nor nonprice rationing. As a consequence, advances policy is viewed as purely passive. Kearl and Rosen (197-4) have the quantity of advances determined by a FHLBB reaction function, again with no role for interest rates, so they have a pure nonprice rationing system. In the MPS model (see Gramlich and Jaffee (1972)) both the quantity and interest rate for advances are set exogenously by the FHLBB, which then implies a combination of interest rate and nonprice rationing. Finally, Silber (1973), in the most sophisticated of the studies, has two versions, one with interest rate and one with nonprice rationing. The version with interest rate clearing has a FHLBB reaction function determining the interest rate and an SLA demand function determining the quantity. The version with nonprice rationing has the FHLBB determine the quantity of advances and no equation for the interest rate, in much the same spirit as Kearl and Rosen. The treatment of rationing in these models is not satisfactory. First, the models specify a priori the presence or absence of rationing, but without providing a test of the hypothesis that rationing takes place. Second, among the rationing models, the specifications are deficient in assuming either that only rationing occurs (Kearl and Rosen, and Silber) or that price and nonprice rationing always occur together (the MPS model). In this paper we develop a model based on optimizing behavior on the part of the FHLBB. Whether market clearing or nonprice rationing behavior obtains in a given time period depends on both economic conditions and the nature of the FHLBB's objective function. As a polar case, the general model collapses into an ordinary market clearing simultaneous equation model and we are able to offer statistical evidence as to which model is to be preferred. In section II.A we develop a market clearing model and in II. B a rationing model. A geometric interpretation is given in section II.C. Section III provides the empirical specification for impleReceived for publication November 6, 1978. Revision accepted for publication July 12, 1979. * We are indebted to NSF Grant SOC77-07680 and the Federal Home Loan Bank Board for support, to Naoyaki Yoshino for helpful comments, and to David Romer for expert research assistance. An earlier version of this paper was presented at the Econometric Society Meetings, Vienna, September 1977. 1 FHLBB Journal, April 1972, p. 24. 2 See Jaffee (1976) for a recent survey of FHLBB structure and policies. 3 Wall Street Journal, May 4, 1979, p. 18.

H UMAN capital theory posits that individuals invest in the acquisition of productive skills in order to derive higher future earnings. While the dichotomy between investments in and skills has long been recognised,t empirical tests of the theory do not usually distinguish between the two earnings components.2 In this paper the conventional earnings model is expanded to incorporate worker-financed specific training. The inclusion of tenure allows a segregation of estimates of returns to general and specific human capital. This disaggregation permits an examination of the relationship between worker-financing of specific training and interindustry wage differentials. Cross-section investigations typically report the importance of industry of employment as a wage determinant, even controlling for a myriad of individual characteristics.3 This result has been taken, perhaps prematurely, as evidence of pervasive labor market imperfections. If interindustry differences in skill specificity are important, we should expect systematic wage differentials. Increased acquisition of worker-financed specific training will be associated with lower initial wages and subsequent higher rates of wage increase. In section I we consider the implications of using alternative specifications of the earnings model. The distinction is drawn between general and specific human capital, allowing a relaxation of the assumption constraining the returns from these mix of skills to be equal across individuals. In the process of this exposition the specific training prediction of a negative relationship between industry standing wages and subsequent rates of wage growth is derived. This hypothesis is subjected to test using individual data from the 1971 National Longitudinal Survey of Young Men, and the results are reported in section II. The complication is raised that workers remain longer in jobs paying higher wages independently of specific training. A simultaneous equations model treating tenure and wage as endogenous variables is tested revealing little bias in the single equation specification. A concluding section summarizes the main findings and offers suggestions for future research in this area.

The present study recognizes that households might change location not only in response to changes in workplace but also in response to changes in housing supply conditions. Furthermore it recognizes that household location decisions might in turn influence the distribution of employment and housing across metropolitan space. The study thus develops a simultaneous-equations model of urban growth and intraurban location that treats housing employment and labor force location within the same framework. (excerpt)