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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
  • University of Rome Tor Vergata Raghav Gaiha
  • University of Delhi

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 & University of Rome Tor Vergata Raghav Gaiha & University of Delhi, 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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    Cited by:

    1. 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.
    2. 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.
    3. Subhasish Dey & Katsushi S. Imai, 2014. "Workfare as "Collateral": The Case of the National Rural Employment Guarantee Scheme (NREGS) in India," Economics Discussion Paper Series 1412, Economics, The University of Manchester.
    4. Deepak, Shah, 2012. "Implementation of NREGA in Maharashtra: experiences, challenges and ways forward," MPRA Paper 39270, University Library of Munich, Germany.
    5. 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.
    6. 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), pages 1-12.
    7. Hazrul Shahiri & Kamal Azri Husin & Wye Chung Khain, 2023. "The Effect of Job Rotation in a Fixed Wage Setting Model," SAGE Open, , vol. 13(1), pages 21582440231, February.
    8. R Gaiha & K Imai, 2005. "A Review of the Employment Guarantee Scheme in India," Economics Discussion Paper Series 0513, Economics, The University of Manchester.
    9. 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.
    10. 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," Economics Discussion Paper Series 1226, Economics, The University of Manchester.
    11. R Gaiha & K Imai, 2006. "Vulnerability and poverty in rural India-estimates for rural south India," Economics Discussion Paper Series 0602, Economics, The University of Manchester.
    12. 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.
    13. 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 - Books, The World Bank Group, number 6582.
    14. Thankom Arun & Katsushi Imai & Frances Sinha, 2006. "Does the Microfinance Reduce Poverty in India? Propensity Score Matching based on a National-level Household Data," Economics Discussion Paper Series 0625, Economics, The University of Manchester.

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    More about this item

    Keywords

    options; uncertainty; entry and exit costs; incentives;
    All these keywords.

    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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