Drivers of income diversification among rural households in the Ethiopian central highlands

Abstract As in most developing countries, farm households in Ethiopia are often engaged in several income diversification activities to mitigate several risks and uncertainties faced by agriculture and address poverty and food insecurity. The benefits of income diversification have been widely documented in the literature. However, little econometric evidence exists on the drivers of income diversification among farm households in Ethiopia. The paper addresses this information gap by investigating the drivers of choice decisions and intensity of income diversification among farm households using data collected from a sample of 385 randomly selected households from the Ethiopian central highlands. Unlike previous studies, our multivariate probit model results show that the choice decision of farm households is significantly interrelated and drivers had heterogeneous effects on the choice decision of households. The findings revealed that age, education, livestock, land, food shortage, agricultural commercialization cluster (ACC), investment in sustainable farming practices, rainfall, and maximum temperature significantly impacted the choice of income diversification. The fractional response logit model results revealed that age, livestock, food shortage, joint household decision‐making, ACC, income, rainfall, and study site significantly impacted the intensity of income diversification. The descriptive results revealed that most farmers (67%) tend to have a more diversified portfolio of income including off‐farm, forest, non‐farm, livestock, crop, and other sources, and the intensity of diversification ranges between 0 and 0.76. The study also finds the presence of both synergies and trade‐offs in different types of diversification. We suggest that there is an urgent need to improve the ways of income diversification among farm households to both the sustainability of small farms and ensure food security.