Is livestock important for risk behaviour and activity choice of rural households? Evidence from Kenya

This paper presents an alternative view on causes of differentiation in rural Kenya, focusing on the role of livestock as liquid assets. We use cross-sectional household data in Central and Western Kenya. We first examine the extent to which households are liquidity-constrained in relation with livestock holdings. It is suggested that many rural households are currently liquidity-constrained and liquidity constraints are closely associated with cattle holdings. We also find that a differentiation process in which the households with high endowments and livestock can augment their income by directing more inputs to high-return activities, while poor households who are more likely to be liquidity-constrained cannot. Our results show that the difference in liquid assets and associated credit constraints is one of the possible causes for differentiation of households in rural Kenya.