Option Values, Switches and Wages - An Analysis of the Employment Guarantee Scheme in India
AbstractConsistent with the theory of real options, it is argued that the value of the Employment Guarantee Scheme (EGS) in the Indian state of Maharashtra and its impact on workers` behaviour do not depend so much on its income supplementation as on enlargement of opportunities in an uncertain environment of the local labour market. The choice between the EGS and other activities in rural areas is modelled in a dynamic optimisation framework that takes into account a fixed wage rate and certainty of employment under the former and a stochastic wage rate in the latter. Besides, entry and exit costs of various employment options are taken into account. Finally, allowance is made for volatility of regular labour market activities (e.g. agricultural wage earnings). The predictions of this model are validated with the help of a panel household survey in a semi-arid region of south India. If this analysis has any validity, the incentive case for rural public works schemes such as the EGS in terms of screening and deterrent arguments, premised on a fixed wage rate differential, needs to be reformulated.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 164.
Date of creation: 01 Jun 2003
Date of revision:
options; uncertainty; entry and exit costs; incentives;
Other versions of this item:
- Pasquale Scandizzo & Raghav Gaiha & Katsushi Imai, 2009. "Option Values, Switches, and Wages: An Analysis of the Employment Guarantee Scheme in India," Review of Development Economics, Wiley Blackwell, vol. 13(2), pages 248-263, 05.
- Katsushi Imai & Pasquale Scandizzo & Raghav Gaiha, 2004. "Option Values, Switches And Wages - An Analysis Of The Employment Guarantee Scheme In India," Royal Economic Society Annual Conference 2004 133, Royal Economic Society.
- D3 - Microeconomics - - Distribution
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- H5 - Public Economics - - National Government Expenditures and Related Policies
- I3 - Health, Education, and Welfare - - Welfare and Poverty
- J2 - Labor and Demographic Economics - - Demand and Supply of Labor
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