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.