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

Katsushi Imai, Pasquale Scandizzo, University of Rome Tor Vergata Raghav Gaiha and University of Delhi

No 164, Economics Series Working Papers from University of Oxford, Department of Economics

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.

Keywords: options; uncertainty; entry and exit costs; incentives (search for similar items in EconPapers)
JEL-codes: D3 D8 H5 I3 J2 (search for similar items in EconPapers)
Date: 2003-06-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Option Values, Switches, and Wages: An Analysis of the Employment Guarantee Scheme in India (2009)
Working Paper: Option Values, Switches And Wages - An Analysis Of The Employment Guarantee Scheme In India (2004)
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