The Effect of Rainfall Uncertainty on Occupational Choice in Rural Nepal

Despite the prevalence of agriculture as the main occupation in rural Nepal, evidence suggests that households strive to diversify their sources of income. This paper investigates why this is the case. Using household data from the World Bank and information on rainfall for the various regions of Nepal, we find that occupational choice is mainly determined by the uncertainty associated with historical rainfall patterns. Where the head is employed in agriculture, other family members are less likely to choose agriculture as an occupation in areas where rain is uncertain. Our results suggest that diversification is necessary in order to insure total household income against aggregate weather shocks. The negative effect of rainfall uncertainty on occupational choice is less obvious in household that have access to credit. The main policy implication of this study is that improving access to credit markets for poor households may help reduce their vulnerability to rain shocks