Knowledge that Transforms

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)

T HEORETICAL models of inventory inl vestment including Belsley (1969), Holt et al. (1960), Whitin (1953) and others invariably suggest the opportunity cost of inventories should be included as a key explanatory variable in any empirical study of inventory behavior. In the absence of an opportunity cost (or other holding costs), the theoretically optimal inventory holding is infinitely large. Even so, it is rather rare any financial variable emerges as statistically significant in empirical studies of inventories.1 Michael Lovell, who has written extensively on inventory investment, goes so far as to comment that the probability of obtaining an interest-rate coefficient with negative sign is 50 percent (1976, p. 400). Even the MITPennsylvania-Social Science Research Council model, which represents an explicit attempt to specify in detail the channels of monetary policy, fails to include monetary variables in its inventory equation.2 The absence of empirical evidence in support of a cost of capital effect on inventory investment renders uncertain what many economists regard as a major channel of monetary policy. It is often commented roughly three quarters of the variance in GNP is accounted for by changes in inventory investment. Since monetary policy is commonly viewed as very powerful, it is truly remarkable so little econometric evidence exists to indicate a cost of capital effect on the most variable component of GNP. This study attempts to re-examine the size and significance of the theoretically important cost of capital effect on inventory investment by utilizing firm specific cost of capital measures, as suggested by the finance theory literature, in a pooled cross section econometric analysis of inventory behavior. The cost of capital measure is computed using the actual balance sheet capitalization particular to each firm in the sample for each point in time. Use of a firm specific cost of capital measure instead of a market interest rate avoids the measurement errors introduced into the analysis by the latter procedure. Risk differences among firms, such as between General Motors and Chrysler, imply substantial differences in capital costs. The errors in measurement problem introduced by a market interest rate will bias towards zero the cost of capital effect. Thus a firm specific cost of capital measure may serve as a more effective opportunity cost variable in an econometric analysis of inventory investment. Perhaps even more critical than the use of firm specific cost of capital measures, the econometric analysis is conducted using two samples of firms with each sample disaggregated by stage of fabrication. The first sample, which includes heavy machinery producing companies, attempts to explain inventory investment behavior for companies produce output in response to orders. The second sample consists of textile companies produce output predominantly to stock in anticipation of orders. Aggregation of firms produce to stock and produce to order-and, in addition, aggregation of inventories across stages of fabrication-may obscure the underlying behavioral characteristics operate, in fact, at the individual firm level. As suggested by theory, the findings of this study indicate the cost of capital is a highly sigReceived for publication May 30, 1978. Revision accepted for publication October 30, 1979. * Federal Reserve Bank of New York. A preliminary draft of this paper was presented at the August 1978 meetings of the Econometric Society in Chicago, Illinois. Financial support for the formative stages of this research was provided by the Computer Science Center of the University of Maryland and from the University Research Board in the form of a faculty research award. The data were provided by the College of Business and Management of the University of Maryland. The author thanks Clopper Almon, Robert Eisner, Irwin Friend, Robert J. Gordon and Joel Popkin for their comments and David Dossetter for very able research assistance. Neither they nor the Federal Reserve Bank of New York nor the Federal Reserve System are responsible for the errors or views contained in this paper. I Studies by Kuznets (1964) and Liu (1963) are among the very few report statistically significant interest rate effects. 2 The paucity of econometric evidence on behalf of cost of capital effects is nevertheless consistent with the prewar survey of Meade and Andrews (1938) (and others) and the postwar surveys of Crockett, Friend and Shavell (1967) and Shavell and Woodward (1971), which questioned managers on the degrees to which they adjusted inventories in response to changes in financial conditions.

In this paper the labor force entry and exit by married women are examined using longitudinal data that enable one to observe actual changes in economic behavior and characteristics. The symmetry assumption is investigated by estimating separate equations for the entry and exit choice. Section II briefly analyzes the wifes labor supply decision and discusses the issue of symmetry. The data and analytical procedure are described in section III and the empirical results are presented in section IV. Some implications of our findings are presented in section V. (excerpt)