AGRICULTURAL ECONOMICS Agricultural Economics 44 (2013) 57–71 Quantifying rural livelihood strategies in developing countries using an activity choice approach Øystein Juul Nielsen a,∗ , Santosh Rayamajhi b , Patricia Uberhuaga c , Henrik Meilby a , Carsten Smith-Hall a a Faculty of Science, University of Copenhagen, Rolighedsvej 23, 1958 Frederiksberg C., Denmark b Tribhuvan University, Institute of Forestry, P.O.Box 203, Pokhara Campus, Pokhara, Nepal c Forest Science School, Universidad Mayor de San Sim´ on, Final Av. Atahuallpa s/n, Zona Temporal, Cochabamba, Bolivia Received 5 November 2011; received in revised form 6 September 2012; accepted 7 September 2012 Abstract This article uses a quantitative activity choice approach, based on identification of activity variables and application of latent class cluster analysis, to identify five major rural livelihood strategies pursued by households (n = 576) in Bolivia, Nepal, and Mozambique. Income sources and welfare outcomes are compared across strategies and household differences in asset holdings are analyzed using multinomial logit regression. Findings reveal that income diversification is the norm, that a higher degree of specialization does not characterize more remunerative livelihood strategies, that nonfarm income significantly contributes to higher income earnings, that environmental reliance does not vary across strategies, and that small-scale farmers are the largest and poorest livelihood group. Some livelihood strategies are superior to all other strategies in terms of income earned; access to more remunerative livelihood strategies is determined by land ownership, education, and ethnic affiliation. Finally, the article also highlights that additional work is required to determine the most suitable methods for livelihood strategy identification. JEL classifications: I31, O30, Q12, Q50, R20 Keywords: Latent class cluster analysis; Cross-country comparison; Environmental income; Household asset endowments 1. Introduction Rural livelihood analyses are central to development re- search that aims to identify appropriate poverty-reducing interventions—what do people do to gain a living, what in- come options provide the most promising means to escape poverty, and what are the entry barriers? Overall, empiri- cal studies show that rural households engage in a diverse set of income-generating activities (e.g., Davis et al., 2010) so as to smooth income, accumulate wealth, and reduce risk exposure. Most studies on the role of income diversification strategies in rural livelihoods use total income to assess how income sources vary across income groups (e.g., Cavendish, 2000; Reardon, 1997). This approach is, however, exposed to the stochastic ∗ Corresponding author. Tel.: +45-353-31535; fax: +45-353-31508. E-mail address: ojn@life.ku.dk (Ø.J. Nielsen) Data Appendix Available Online A data appendix to replicate main results is available in the online version of this article. nature of income, which potentially could introduce consid- erable variation in apparent income dependencies from year to year (Barrett et al., 2001). For example, crop income may show considerable yearly fluctuations due to climatic varia- tion; but low income in low return years does not necessarily imply less importance of this income source to rural house- holds. Even if income was not stochastic, households in the same income groups may differ on a number of asset charac- teristics and, hence, on how they invest in different income- generating activities. Thus, certain income strategies risk be- ing averaged out if households are grouped according to total income. Few income studies use multiple criteria to account for different income strategies. Ellis (2000), for example, uses the relative contribution of several income sources to group households into income strategy typologies. This study, how- ever, proposes a different approach to account for the mul- tiple activities households engage in and the stochastic na- ture of their outcomes. Rather than using relative shares of income components, the article defines income strategies ac- cording to household asset allocations into different income- generating activities; these strategies are termed livelihood c  2012 International Association of Agricultural Economists DOI: 10.1111/j.1574-0862.2012.00632.x