Credit Constraints and Labor Availability: Effects of MGNREGA on Household Income Diversification Across Microenterprise and Livestock Ownership

Households diversify income through activities that differ in required input intensities. When a policy shock alters households’ available endowments, it can change the composition across these activities. While existing literature typically examines how changes in a single input, such as capital or labor, affect participation in a specific activity like entrepreneurship, this study considers the MGNREGA work-for-wage policy that simultaneously affects both credit access and labor availability. Such a policy is expected to shift households’ allocation between labor-intensive and capital-intensive activities. By relaxing credit constraints while reducing the labor availability for other income-smoothing pursuits, the policy is predicted to decrease engagement in labor-intensive microenterprises and increase participation in livestock ownership, a relatively capital-intensive activity. This theoretical prediction is consistent with the intuition of the Rybczynski theorem from international trade. Using IHDS data, the empirical analysis implementing a system of equations approach supports these expectations, with results remaining robust across alternative specifications.