An employment guarantee as risk insurance ? assessing the effects of the NREGS on agricultural production decisions

Uninsured risk constrains households in their production decisions in many developing countries. Similarly to crop insurance, employment guarantees can support farmers in managing agricultural production risks. Evidence from representative panel data of Andhra Pradesh, India, suggests that the National Rural Employment Guarantee Scheme (NREGS) reduces households'uncertainty about future income streams because it provides employment opportunities in rural areas independently of weather shocks and crop failure. Because the NREGS makes an ex-post labor supply response to agricultural shocks more efficient, households with access to the NREGS can shift their production towards riskier but also more profitable crops. The observed shifts in agricultural production do considerably raise the profitability of agricultural production and hence the incomes of smallholder farmers. The findings are not driven by changes in the labor or cost intensity of those crops, which supports the idea that the causal mechanism underlying the observed changes is indeed an insurance effect.