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Abstract

Peasant households, especially African rural households, can hold very diversified portfolios of economic activities. Portfolio diversification is often seen as a risk-reducing mechanism and linked with lowering risk at the cost of a lower income. A simple theoretical model of activity choice reveals that factors other than risk might influence the desire to diversity. In addition, binding entry-constraints might exist for certain off-farm activities. An empirical analysis of Ethiopian rural households suggests that entry-constraints are important in explaining portfolio and that diversification can actually result in increasing income.

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