A three-factor model of a small country or region is used to analyze the general equilibrium consequences of three frequently advocated regional development policies--investment subsidies, migration incentives, and educational expenditures. The analysis focuses on policy-induced changes in absolute and relative factor earnings. The results link changes in the distribution of income to the degree of complementarity and substitutability among factors of production and to the pricing scheme adopted by educational institutions. Programs intended to aid lagging regions may produce perverse results, particularly if the cost of education is the same to all individuals regardless of ability.

A three-factor model of a small country or region is used to analyze the general equilibrium consequences of three frequently advocated regional development policies--investment subsidies, migration incentives, and educational expenditures. The analysis focuses on policy-induced changes in absolute and relative factor earnings. The results link changes in the distribution of income to the degree of complementarity and substitutability among factors of production and to the pricing scheme adopted by educational institutions. Programs intended to aid lagging regions may produce perverse results, particularly if the cost of education is the same to all individuals regardless of ability.

Martin Feldstein:1 Chairman Alan Greenspan's remarks today give us an opportunity to understand his thinking about monetary policy and about the Federal Reserve's actions during the past 15 years. It was a period of substantial accomplishment that no doubt reflects in considerable measure the views of the Chairman himself. The Fed's primary goal, price stability, has been achieved, with inflation down from 4 percent at the end of the 1980's to about 1.5 percent now. The 2-percentage-point difference between the interest rate on conventional Treasury bonds and on inflation-indexed bonds (TIPS) shows that financial markets expect inflation will remain at about 2 percent for at least the next decade.

This paper introduces the fair wage-effort hypothesis and explores its implications. This hypothesis is motivated by equity theory in social psychology and social exchange theory in sociology. According to the fair wage-effort hypothesis, workers proportionately withdraw effort as their actual wage falls short of their fair wage. Such behavior causes unemployment and is also consistent with observed cross-section wage differentials and unemployment patterns.