Income Growth and Mobility of Rural Households in Kenya: Role of Education and Historical Patterns in Poverty Reduction

Empirical Model

A full income production function based on equation (4) is estimated to determine the
key factors that cause changes in the economic well being of rural households in Kenya.
In this study, we use the reduced form version of equation (4) comprising of all the
exogenous variables in the system and other relevant variables. The underlying
assumption of this model is that real household income is a function of the household’s
endowments or stock of assets (Xit) and the economic environment (Zit) in which these
assets become productive and an error term (ε):

Yit = f (Xit, Zit, εit)                                                                                     (5)

The empirical specification of the income model, accounting for historical
patterns is given by:

INCit = αo + INCit-1α1 + X_wδ + Z_wλ + ⅛ i = 1,.....,n t=1,.......,T              (6)

where: INC is the real value of income. Included in X are variables related to the
household’s endowments of physical, social and human capital, while the Z’s include
locational and other socio-economic characteristics of the household.

The inclusion of a lagged dependent variable helps to account for historical
patterns and may also serve as control for some omitted variables. While an indication of
the pattern of income growth is undeniably relevant, it would also be of policy
importance to assess how education affects these income growth rates and persistence.
This implies that the coefficient of the lagged income variable may vary across
households with different educational levels. We therefore add an interaction term for the
lagged income variable and some measures of human capital to determine how income
persistence differs by education. The education of the head of household is used given

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