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Option Values, Switches, and Wages: An Analysis of the Employment Guarantee Scheme in India

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  • Pasquale Scandizzo
  • Raghav Gaiha
  • Katsushi Imai

Abstract

Consistent with real option theory, the authors argue that the value of the Employment Guarantee Scheme (EGS) in rural India and its impact on workers' behavior does not depend so much on its income supplementation as on enlargement of opportunities in the uncertain local labor market. The choice between the EGS and other activities is modeled in a dynamic optimization framework, taking into account a fixed wage rate and certainty of employment under the EGS and a stochastic wage rate under other activities. Specifically, volatility of wages in the rural labor markets has important implications for switches into the EGS and for concomitant welfare effects. Under such conditions, the higher the EGS wage, the greater is its attractiveness to relatively skilled and affluent workers, and for those already in it to continue. These and related predictions of the model are validated by panel data estimation. Copyright © 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 13 (2009)
Issue (Month): 2 (05)
Pages: 248-263
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Handle: RePEc:bla:rdevec:v:13:y:2009:i:2:p:248-263

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  1. Besley, T. & Coate, S., 1989. "Workfare Vs. Welfare: Incentive Arguments For Work Requirements In Poverty Alleviation Programs," The Warwick Economics Research Paper Series (TWERPS) 314, University of Warwick, Department of Economics.
  2. T. N. Srinivasan, 1994. "Destitution: A Discourse," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1842-1855, December.
  3. Raghav Gaiha, 2000. "On the Targeting of the Employment Guarantee Scheme in the Indian State of Maharashtra," Economic Change and Restructuring, Springer, vol. 33(3), pages 203-219, October.
  4. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-61, March.
  5. Subramanian, Shankar & Deaton, Angus, 1996. "The Demand for Food and Calories," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 133-62, February.
  6. Gaiha, Raghav, 2000. " On the Targeting of the Employment Guarantee Scheme in the Indian State of Maharashtra," Economic Change and Restructuring, Springer, vol. 33(3), pages 203-19.
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Cited by:
  1. Raghav Gaiha, 2004. "Is There a Case for the Employment Guarantee Scheme in India? Some Recent Evidence," ASARC Working Papers 2004-09, Australian National University, Australia South Asia Research Centre.
  2. R Gaiha & K Imai, 2006. "Vulnerability and poverty in rural India-estimates for rural south India," The School of Economics Discussion Paper Series 0602, Economics, The University of Manchester.
  3. Thankom Arun & Katsushi Imai & Frances Sinha, 2006. "Does the Microfinance Reduce Poverty in India? Propensity Score Matching based on a National-level Household Data," The School of Economics Discussion Paper Series 0625, Economics, The University of Manchester.
  4. R Gaiha & K Imai, 2005. "A Review of the Employment Guarantee Scheme in India," The School of Economics Discussion Paper Series 0513, Economics, The University of Manchester.

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