Income Diversification and Rural Consumption-Evidence from Chinese Provincial Panel Data

In China, income diversification has become a useful method for the rural households to smooth their income and maintain a sustainable mode of consumption. Additionally, income diversification affects rural consumption differently in regions with different income levels. In this paper, I have analyzed the impacts of income diversification on the peasants' consumption in the Chinese rural areas with the provincial level panel data from 1998 to 2015. The findings indicate that income diversification can increase the Chinese peasants' consumption, but the consumption of the peasants from the low-and the high-income subsamples of provinces are more sensitive to income diversification while the peasants from the middle-income provinces are not so sensitive to income diversification. Moreover, there is a significant ratchet effect and demonstration effect in the peasants' consumption, as is stated by the traditional literature. This paper contributes to the research by testing the impact of peasants' income sources diversification on the rural consumption and investigating its mechanism against the changing social background in China with the latest panel data.