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Option Values, Switches and Wages - An Analysis of the Employment Guarantee Scheme in India

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  • Katsushi Imai
  • Pasquale Scandizzo

Abstract

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.

Suggested Citation

  • Katsushi Imai & Pasquale Scandizzo, 2003. "Option Values, Switches and Wages - An Analysis of the Employment Guarantee Scheme in India," Economics Series Working Papers 164, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:164
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper164.pdf
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    References listed on IDEAS

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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, pages 1842-1855.
    3. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, pages 249-261.
    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, pages 203-219.
    6. Gaiha, Raghav, 2000. "On the Targeting of the Employment Guarantee Scheme in the Indian State of Maharashtra," Economic Change and Restructuring, Springer, pages 203-219.
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    Citations

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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. Raghav Gaiha & Md Shafiul Azam & Samuel Annim & Katsushi S. Imai, 2012. "Agriculture, Markets and Poverty – A Comparative Analysis of Laos and Cambodia," The School of Economics Discussion Paper Series 1227, Economics, The University of Manchester.
    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. 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, pages 47-61.
    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.
    12. Katsushi S. Imai & Raghav Gaiha & Ganesh Thapa, 2015. "Does Non-Farm Sector Employment Reduce Rural Poverty and Vulnerability? Evidence from Vietnam and India," Discussion Paper Series DP2015-01, Research Institute for Economics & Business Administration, Kobe University.
    13. 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.
    14. 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

    Keywords

    options; uncertainty; entry and exit costs; incentives;

    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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