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

16 Pages Posted: 27 Apr 2009

See all articles by Pasquale Lucio Scandizzo

Pasquale Lucio Scandizzo

affiliation not provided to SSRN

Raghav Gaiha

University of Delhi - Department of Economics; Australian National University (ANU)

Katsushi S. Imai

University of Manchester - School of Social Sciences

Abstract

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.

Suggested Citation

Scandizzo, Pasquale Lucio and Gaiha, Raghav and Imai, Katsushi S., Option Values, Switches, and Wages: An Analysis of the Employment Guarantee Scheme in India. Review of Development Economics, Vol. 13, Issue 2, pp. 248-263, May 2009. Available at SSRN: https://ssrn.com/abstract=1385485 or http://dx.doi.org/10.1111/j.1467-9361.2008.00484.x

Pasquale Lucio Scandizzo

affiliation not provided to SSRN ( email )

Raghav Gaiha

University of Delhi - Department of Economics ( email )

Delhi-110007
India

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Katsushi S. Imai

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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