Does income diversification improve household consumption expenditure? Evidence from rural central Vietnam

Abstract

This study examined the determinants of income diversification and its effect on household consumption expenditure in rural Central Vietnam. The data were drawn from the Vietnam Household Living Standards Survey 2016 (VHLSS 2016), covering 1,445 rural households across 14 provinces in the region. The Simpson Index of Diversity (SID) was used as the measure of diversification, while a Tobit specification accounted for the corner solutions inherent in the data. A two-stage least squares procedure, using the number of non-farm workers per household as an instrument, addressed the endogeneity concern when modelling per capita consumption. The empirical results suggested that the typical rural household was only modestly diversified, with no marked gap between income quintiles. Ethnicity, household size, age of the household head, access to electricity, access to information, access to financial services, and the participation of household members in non-farm work emerged as the strongest predictors of diversification. More importantly, diversification raised per capita consumption. The findings reinforced the view that broadening the income base of rural households did more than smooth shocks; it lifted welfare.