Managing Productivity Risk Through Employment Guarantees: Evidence from India
Abstract:
Productivity shocks due to droughts are a major source of risk for rural households in developing countries. In underdeveloped areas where informal risk coping mechanisms are often inadequate, policy safety nets that reduce risk can be especially important. We find that by generating employment to create local infrastructure, India’s National Rural Employment Guarantee Act (NREGA) enables workers to supply labor more elastically. A one standard deviation increase in a district’s infrastructure under the program reduces the sensitivity of the wage to productivity shocks by 30%. We also find evidence that the program has effects on ex-ante production decisions enabling farmers to increase the share of land cultivated with high-risk but higher-return cash crops by 4%-9%. Our results suggest that voluntary workfare programs can enhance social insurance by facilitating ex-post risk management as well as by deterring costly ex-ante income smoothing.
