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Households living in rural areas of developing countries rely on rain-fed agriculture for their livelihoods and, as such, are highly dependent on climatic conditions. This paper aims at presenting empirical evidence from Zambia to better understand the linkages between climatic shocks, livelihood diversification and welfare outcomes with the goal of highlighting potential policy entry points to incentivize the types of diversification aimed at improving food security and resilience to climate shocks. We also investigate the role of different institutions in shaping diversification decisions to shed some light into potential policy levers at institutional level. We analyze diversification of crops, livestock and income using nationally representative household data from 2012 Rural Agricultural Livelihoods Survey (RALS), merged with data on historical rainfall and temperature as well as with administrative data on relevant institutions. We find that the long-term variation in growing period rainfall pushes households into livestock diversification, whereas the effect of this variable on income diversification is negative. This indicates that households fall back to subsistence maize cultivation in the face of unpredictable rainfall and suggests a lack of other ex-ante risk management strategies available to rural households. We also find that smallholders and female-headed households diversify significantly less, providing suggestive evidence for targeting policies that aim to diversify rural livelihood portfolios. Most rural institutions do not have a significant effect on incentives to diversify under high rainfall variability environments, pointing towards a lost opportunity to use these institutions in incentivizing diversification as a way of decreasing vulnerability.

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