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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.

Suggested Citation

  • 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, May.
  • Handle: RePEc:bla:rdevec:v:13:y:2009:i:2:p:248-263
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    1. Martin Ravallion & Gaurav Datt, 1995. "Is Targeting Through a Work Requirement Efficient? Some Evidence for Rural India," Monash Economics Working Papers archive-41, Monash University, 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. 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 249-261, March.
    4. Subramanian, Shankar & Deaton, Angus, 1996. "The Demand for Food and Calories," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 133-162, February.
    5. 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.
    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 203-219.
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    Cited by:

    1. Raghav Gaiha & Vani S. Kulkarni & Manoj K. Pandey & Katsushi S. Imai, 2009. "National Rural Employment Guarantee Scheme, Poverty and Prices in Rural India," ASARC Working Papers 2009-03, The Australian National University, Australia South Asia Research Centre.
    2. Imai, Katsushi S. & Gaiha, Raghav & Thapa, Ganesh, 2015. "Does non-farm sector employment reduce rural poverty and vulnerability? Evidence from Vietnam and India," Journal of Asian Economics, Elsevier, vol. 36(C), pages 47-61.
    3. Katsushi S. Imai & Raghav Gaiha & Woojin Kang & Samuel Annim & Ganesh Thapa, 2012. "Does Risk Matter? A Semi-parametric Model for Educational Choices in the Presence of Uncertainty," The School of Economics Discussion Paper Series 1226, Economics, The University of Manchester.
    4. Shah, Deepak K. & Mohanty, Sovna, 2010. "Implementation of NREGA During Eleventh Plan in Maharashtra: Experiences, Challenges and Ways Forward," Indian Journal of Agricultural Economics, Indian Society of Agricultural Economics, vol. 65(3).
    5. Klonner, Stefan & Oldiges , Christian, 2014. "Safety Net for India's Poor or Waste of Public Funds? Poverty and Welfare in the Wake of the World's Largest Job Guarantee Program," Working Papers 0564, University of Heidelberg, Department of Economics.
    6. Subhasish Dey & Katsushi S. Imai, 2014. "Workfare as "Collateral": The case of the National Rural Employment Guarantee Scheme (NREGS) in India," Discussion Paper Series DP2014-27, Research Institute for Economics & Business Administration, Kobe University, revised Mar 2015.
    7. Deepak, Shah, 2012. "Implementation of NREGA in Maharashtra: experiences, challenges and ways forward," MPRA Paper 39270, University Library of Munich, Germany.
    8. 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.
    9. Zhigang Zheng & Li-An Zhou & Yanmei Sun & Chao Chen, 2016. "Executive Compensation and Legal Investor Protection: Evidence from China's Listed Firms," Review of Development Economics, Wiley Blackwell, vol. 20(1), pages 39-47, February.
    10. Raghav Gaiha, 2004. "Is There a Case for the Employment Guarantee Scheme in India? Some Recent Evidence," ASARC Working Papers 2004-09, The Australian National University, Australia South Asia Research Centre.
    11. Margaret Grosh & Carlo del Ninno & Emil Tesliuc & Azedine Ouerghi, 2008. "For Protection and Promotion : The Design and Implementation of Effective Safety Nets," World Bank Publications, The World Bank, number 6582, June.
    12. 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.
    13. 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.

    More about this item

    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, Well-Being, and Poverty
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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