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Option Values, Switches And Wages - An Analysis Of The Employment Guarantee Scheme In India

  • Katsushi Imai
  • Pasquale Scandizzo
  • Raghav Gaiha

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 Royal Economic Society in its series Royal Economic Society Annual Conference 2004 with number 133.

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Date of creation: 17 Sep 2004
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Handle: RePEc:ecj:ac2004:133
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  1. 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.
  2. 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.
  3. 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.
  4. T. N. Srinivasan, 1994. "Destitution: A Discourse," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1842-1855, December.
  5. 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.
  6. 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.
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