IS NON-FARM INCOME RELAXING FARM INVESTMENT LIQUIDITY CONSTRAINTS FOR MARGINAL FARMS? AN INSTRUMENTAL VARIABLE APPROACH

Abstract

This paper tests the hypothesis that off-farm income relaxes the liquidity constraints of farm households using survey data derived from 734 households from eight villages, drawn from the three agro-climatic zones of northern Ethiopia. The results of the econometric models show that off-farm income positively affects agricultural input expenditure but negatively affects livestock investment. This may be explained by the higher per capita land holdings of households who invest in improved agricultural inputs compared to those who invest in livestock. Our results show the complementarities between off-farm activities and productivity enhancing investment for agricultural inputs. However, off-farm activities may be competing for labor resources for landless and near landless households (those who invest in livestock).

Keywords

• off-farm-farm linkage* IVTobit *

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