Substitution versus wealth: Dual effects of non-pastoral income on livestock herd size

Abstract

This study examines the non-linear impact of non-pastoral income on livestock herd size using balanced panel data collected through surveys in 2013, 2016, and 2018 in pastoral areas in Inner Mongolia, China. Unlike previous studies, this analysis proposes that non-pastoral income has both substitution and wealth effects on livestock herd size. Our theoretical model and empirical result reveal a U-shaped relationship between non-pastoral income and livestock herd size. Initial increase in non-pastoral income and employment partially substitutes out livestock production, resulting in decreased livestock herd size. However, with continued increase in non-pastoral income, the wealth effect begins to dominate. Due to the inability to trade pasture ownership and inefficient transfer of use rights given the current Chinese land tenure system, wealth accumulated through non-pastoral income may enable additional animal production, which leads to increased livestock herd size and possible overgrazing. Our findings suggest sustainable use and management of pastures should consider the nonlinear impact of non-pastoral income under the prevailing land tenure system.