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Income Guarantees and Borrowing in Risky Environments: Evidence from India's Rural Employment Guarantee Scheme

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  • Bell, Clive

    (Heidelberg University)

  • Mukhopadhyay, Abhiroop

    (Indian Statistical Institute)

Abstract

This paper investigates the effects of an income guarantee on borrowing to smooth consumption and finance cultivation in a risky setting with marked seasonality. A three-season, infinite-horizon theoretical model is developed and analyzed. The insights yielded by the model are then used to interpret results from an empirical analysis which uses data on a sample of households in a semi-arid region of Odisha state. The potential endogeneity of borrowing and NREGS earnings is instrumented using the female reservation for local elections. An additional day of work at the regulated wage reduces the estimated amount borrowed for consumption by about half the wage. For the financing of working capital, it increases such borrowing by an estimated amount that is almost twice as large as the wage. NREGS is therefore effectively a substitute for borrowing if a household does not cultivate, but a complement if it does so.

Suggested Citation

  • Bell, Clive & Mukhopadhyay, Abhiroop, 2015. "Income Guarantees and Borrowing in Risky Environments: Evidence from India's Rural Employment Guarantee Scheme," IZA Discussion Papers 9357, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp9357
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    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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