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

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Author Info
Katsushi Imai
Pasquale Scandizzo
Raghav Gaiha

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Abstract

Consistent 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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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 164.

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Date of creation: 2003
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Handle: RePEc:oxf:wpaper:164

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Related research
Keywords: options uncertainty entry and exit costs incentives

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Find related papers by JEL classification:
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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Besley, T. & Coate, S., 1991. "Workfare vs. Welfare: Incentive Arguments For Work Requirements In Poverty Allevation Programs," Papers 73, Princeton, Woodrow Wilson School - John M. Olin Program.
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  2. 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. [Downloadable!] (restricted)
  3. T. N. Srinivasan, 1994. "Destitution: A Discourse," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1842-1855, December. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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. [Downloadable!]
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