Knowledge that Transforms

If insuring creditors of commercial banks in the way they have been insured since mid-1933 is justified, then so is regulation of so-called insured banks, those with creditors insured by the Federal Deposit Insurance Corporation (FDIC). In creating the FDIC, the Congress mandated a pricing policy: all banks with FDIC-insured creditors were to be charged alike; more particularly, the FDIC was not to charge insured banks according to the riskiness of their respective balance sheets. Nor has it ever. Yet, with an insurance premium that is constant across balance sheets, there is an incentive for risk taking. And thus, unless insured banks are to be as risky as profit maximization dictates, they must, one way or another, be effectively regulated; they must, that is, be limited by regulation to appropriately risky balance sheets. It does not follow that U.S. bank regulatory policy of the years since 1933 is beyond criticism. For example, we must wonder about the geographical restrictions imposed under the McFadden Act and the Douglas Amendment to the Bank Holding Company Act. But it does follow that if banks with FDIC-insured creditors are to be made entirely free, except perhaps of reserve requirements, or even largely free, then it is necessary to either close up the FDIC or, if doing that seems unwise, change FDIC policy. There has already been some deregulation. Most importantly, Regulation Q has been made much less effective than it was; and evidently it has been marked to become, very soon, a thing of the past. So far, however, beyond deregulating, the Congress has not bestirred itself. The FDIC is still occupying its Washington corner. Although FDIC officials have hinted at change, its policy is still by and large what it was. And the Congress, being ever so respectful of the consumer lobby, may never want to do anything. Nevertheless, in this paper I consider various things it might do: namely, close down the FDIC, but at the same time impose a new valuation rule for bank portfolios; change FDIC pricing policy; and, lastly, without doing anything else, simply close down the FDIC. I do not end up by saying what, as I believe, the Congress ought to do. My purpose is only to determine, as best I am able, which of those several apparent congressional options of mine are in reality feasible. I would add, however, that the Congress, if bent on deregulating banks or obliging the regulatory agencies, has more to do than decide what to do about the FDIC. It seems also to be bent on deregulating or allowing the deregulation of savings and loan associations. There has already been more deregulation of savings and loan associations than of banks. So the Congress has also to decide what to do about the Federal Savings and Loan Insurance Corporation (FSLIC). Fortunately, to explore what it might do about the FDIC is perforced to explore what it might do about the FSLIC.

Seniority rules for layoffs are a widespread feature of the union and nonunion workplace. Many explanations have been offered for their existence. Some emphasize the role of unions, but others argue that seniority rules can promote economic efficiency. In this context, the rules are simple, easy to implement, and widely regarded as fair. They may help control turnover and conserve valuable investments in specific capital. They may also be a response to the higher reliability of more experienced workers. Or they may reflect the higher value young workers place on their time at home or at search.' In this company, a new explanation is hardly needed, and this note will not provide one. Rather, I will show that one of the most commonly accepted explanations is based on an assumption that is quite unrealistic. One of the most plausible explanations for seniority rules seems to follow directly from human capital theory.2 Senior workers, having had more time to invest in on-the-job training, are likely to be more productive. The seniority rule may therefore be a convenient rule of thumb which ensures that, on average, it is the less productive workers who are let go while the more productive ones are hoarded until business picks up. This argument has been given added weight by some results from implicit contract theory. When workers differ in skill levels, but share the same value of time at home, efficient contracts will always lay off the unskilled workers before the skilled ones. The natural corollary again seems to be that where senior workers are more skilled, they should be last to go.3 I show in this paper, however, that when skill grows with experience (as human capital models predict), this corollary is false. In fact, human capital growth by itself predicts that it is the most senior workers who should be laid off first. Previous writers have missed this result because they have implicitly (and unrealistically) assumed that workers continue to gain productive skills while sitting at home on layoff. My analysis will also shed light on some aspects of collective bargaining contracts and on the phenomenon of early retirement. The results are first derived in the context of an implicit contract model which is stripped of all but the barest essentials. Subsequently, the robustness of the conclusions is examined in a series of extensions. Finally, some implications of the analysis are discussed.

The Government of the People's Republic of China considers that the prospects for rapid and broadbased economic growth in China depend crucially on the ability to increase production in the agricultural sector. The major instruments available to the government include reform of the institutional structure of farm management, modification of the farm price structure, and increase of budgetary expenditure in support of agriculture. Since 1978, the central government has stressed use of the first two instruments and some initial judgments can be made about the effectiveness of its measures based on recent official statistics.

The economy of massed reserves, first mentioned by E. A. G. Robinson (1958, pp. 26-27), is now firmly established in industrial organization literature as an example of a potential plant-level scale economy. The massing of reserves results in a savings in proportion of required reserves to expected output as scale of a facility increases. Examples of such reserves are bank tellers, specialized tools and equipment, repairmen, inventories, spare parts, and checkout lines. The potential economies from massing reserves are dependent on underlying stochastic processes governing supply and/or demand of service provided. Theoretical justification for economies of massed reserves has usually been based on an appeal to law of large numbers. For example, Donald Hay and Derek Morris wrote the law of large numbers makes number of breakdowns more predictable in a plant using a large number of machines, so that number of stand-by maintenance staff need not be increased in proportion to size (1979, p. 44). This paper demonstrates that law of large numbers does not provide a theoretical explanation of massed-reserves scale economies. Instead, it is shown that expected economies of massed reserves can be calculated from steady-state properties of well-known queuing models. Queuing models apply to any case where a servicing input is held in reserve to cope with stochastic nature of market or production process. In addition, a method for quantifying expected economies of queuing processes is developed. The magnitude of these expected economies is shown to be significant and calculable. For example, expected economies inherent in a widely applied queuing model are shown to exceed 23 percent in some cases. Section I establishes irrelevance of law of large numbers as a theory of scale economies. Section II provides a formal method for determining scale economies inherent in most often mentioned massed-reserves example: machine repair. Section III shows that same method can be used to calculate scale economies for remaining massed-reserves examples: specialized repair tools and equipment; checkout counter clerks, bank tellers, and other service personnel; capacity; and inventories and spare parts. In addition, it is demonstrated that same method can be used to calculate scale economies for some multiproduct operations.

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