Abstract
Off-farm diversification offers an important pathway out of poverty while health-impaired rural farmers can hardly seize the opportunity in developing countries. This paper investigates how chronic illness shapes livelihood structure and income generation in rural China. Our sample consists of 3850 rural households in Southern China and we rely on instrumental variable regressions to identify causal effects. We find that farmers with chronic illness tend to diversify towards local off-farm employments, rather than migrants, since local off-farm employments are more likely to act in a strategically complementary way to farming. Further analysis shows that income returns of diversification tend to be substantially higher for the health-impaired. While the relationship between diversification and income presents a conventional inverted U shape for the healthy, it is best categorized as upward sloping with diminishing marginal effects for farmers with chronic illness.