Off-Farm Labor Supply and Correlated Shocks: New Theoretical Insights and Evidence from Malawi

Abstract

AbstractWe offer new conceptual insights into the understanding of occupational choice in uncertain rural environments, with a focus on its ex ante (before a shock) and ex post (after a shock) consequences for farmers belonging to different portions of the asset distribution. We model theoretically the choice between relatively safe subsistence farming, higher return but higher risk cash crop activities, and off-farm labor—conditional on preexisting asset allocation—and look at the general equilibrium labor market implications of correlated shocks. Our results, backed by evidence from Malawi, challenge some stylized perceptions in the literature on consumption smoothing via off-farm labor supply.