Option Values, Switches, and Wages: An Analysis of the Employment Guarantee Scheme in India
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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Volume (Year): 13 (2009)
Issue (Month): 2 (05)
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References listed on IDEAS
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- 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.
- 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.
- T. N. Srinivasan, 1994. "Destitution: A Discourse," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1842-1855, December.
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- 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.
- 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.
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