Heterogeneous Effects of Farm and Nonfarm Income on Household Consumption Expenditure and Inequality

ABSTRACT This study examines the heterogeneous effects of farm income and nonfarm income on household consumption expenditure and consumption expenditure inequality, using data from the 2016 China Labor Force Dynamics Survey. A two‐stage residual inclusion model is employed to address the endogeneity of nonfarm income. Results show that nonfarm income plays a larger role in raising household consumption expenditure than farm income. Specifically, an increase of 1000 yuan in farm and nonfarm income raises household consumption expenditures by 134 and 215 yuan/capita, respectively. Furthermore, nonfarm income is associated with consumption expenditure inequality, while farm income is not. Disaggregated analyses show that nonfarm income has larger effects than farm income on expenditures on food, consumer goods, and transportation; the reverse is true for medical care and gift expenditures. These findings suggest that policies promoting nonfarm employment and supporting farm income growth can help improve rural household consumption while addressing consumption inequality.