The engagement in the non-agricultural sector as a risk-mitigating strategy in rural Pakistan

The paper investigates whether, as is often suggested by the literature, diversification towards the non-agricultural sector is considered as a risk-mitigating strategy by rural Pakistani households. This issue has already been addressed but usually as an ex post mechanism, i.e. smoothing consumption or income once a shock has occurred. The present work tests whether ex ante engagement in the non-agricultural sector is partly motivated by a desire to mitigate risk. The main feature of the paper is the use of an ex ante food vulnerability estimate. Vulnerability is defined as the probability of falling below a given threshold in the future. After constructing a vulnerability variable for each household, we run three separate probit estimations, one for each type of non-agricultural activity (unqualified wage labour, qualified wage labour, and self-employment), in order to evaluate the impact of vulnerability on participation to the non-agricultural sector. We take into account the endogeneity of the vulnerability estimate. We find that, conversely to what is usually assumed in the literature, vulnerable households are not more likely than others to engage in the non-agricultural sector mainly because of the inefficient organisation of wage labour markets and entry barriers.