Distributional effects of non-farm income on farm income and household welfare: Evidence from rural Ghana

Franklin Nkudefe  Adjotor; Samuel  Ampaw; Bernardin Senadza

Franklin Nkudefe Adjotor Department of Economics, University of Ghana https://orcid.org/0009-0005-9162-2730
Samuel Ampaw Global Poverty Research Lab, Kellogg School of Management, Northwestern University, USA https://orcid.org/0000-0001-5881-4347
Bernardin Senadza Department of Economics, University of Ghana https://orcid.org/0000-0002-6387-3306

Keywords: Farm income, non-farm income, rural household, quantile, Ghana

Abstract

The study examines the impact of non-farm income on farm income across the income distribution of rural households in Ghana, as well as its effect on poverty incidence. Data were obtained from the 7th Round of the Ghana Living Standards Survey. Quantile and probit regression models with instrumental variables were employed to achieve the study’s objectives. Quantile regression results show that non-farm income helps stabilize farm income but is less effective for the poorest households. A one-unit increase in non-farm income raises rural farm income by 14.2 percentage points (p < 0.05) at the 50th quantile and 14.7 percentage points (p < 0.05) at the 75th quantile but has no significant effect at the 25th quantile. The probit regression further reveals that non-farm participation reduces poverty, but this only holds for households in the lower half of the income distribution. Our findings underscore the need for complementary economic activities for improving the livelihoods of rural populations. It also calls for a review of the land tenure system, which the study identified as having adverse effect on the poorest households. This study provides new insights into the impact of rural non-farm activities on agricultural households, detailing their role in alleviating poverty across the income distribution.