Heterogeneous Returns to Income Diversification : Evidence from Nigeria

This paper investigates the impact of income diversification on farming households' welfare in Nigeria on two rounds of the Nigeria General Household Survey-Panel, namely the 2010/2011 and 2012/2013. The study finds that income diversification is the norm in Nigeria, with about 60 percent of farmers diversifying away from subsistence farming into non-farm activities and cash crops. In addition, using the panel of farmers interviewed before and after a severe drought that hit Northern Nigeria in particular in 2011, the study finds that diversification increased throughout Nigeria from 60 to 64 percent and in the North from 58 to 63 percent. The study postulates the existence of heterogeneous returns on diversification as a consequence of the drought, and estimates the returns through a non-parametric selection model using a local instrumental variable. The choice of this model is dictated by the necessity to account for both heterogeneous effects of diversification and selection bias related to households' decision to diversify. Overall, it is found that diversification positively affects consumption in Nigeria. However, who benefits the most is crucially determined by the initial conditions under which diversification is undertaken and the specific agro-climatic context in which households operate