hours (Ruiz and Vargas-Silva 2018). Hence, to identify the causal impact of refugee inflow on livelihood diversification and commercialization, we employ a two-stage least squares (2SLS) econometric specification strategy using potential refugee inflow as an instrument. Potential refugee inflow is constructed as the product of population density and intensity of conflicts (number of fatalities per event) in the closest region of the origin country to the refugee camp weighted by the inverted distance of the refugee camp to the closest region<sup>4</sup> (i.e., the shortest distance to the border between the refugee camp and the bordering country of origin). Similar (weighted) instruments have been used in the literature (e.g., Baez 2011; Fallah et al. 2019) and proved to be an appropriate instrument to study the socio-economic impact of refugees on host communities.

Livelihood diversification and agricultural commercialization are the two main common strategies that people in low-income countries adopt to improve or maintain their livelihood and welfare. Given the prevailing under-developed insurance market in the event of shocks, households tend to pursue several income generating activities. However, potential barriers such as low asset endowment hinder households' successful livelihood diversification (Ellis 2000; Martin and Lorenzen 2016; Loison 2015). As most households in low-income countries do not have access to cash-based income earning activities (e.g., salary employment), they often sell their products (e.g., crop, livestock) in the market to make a living and meet cash requirements (school fees, buying fuel, etc.). However, due to limited access to markets and to information on market prices, the degree of agricultural commercialization is low (Newshan et al. 2018). An unexpected and sudden inflow of refugees might bring both benefits and constraints to the local economy, which might then create or shrink opportunities for livelihood diversification and agricultural commercialization. Hence, it is important to understand how livelihood strategies of people in host communities change in the presence of refugees. The current paper attempts to address whether refugee inflow expands or diminishes opportunities for livelihood diversification and agricultural commercialization.

Our findings show that refugees bring substantial benefits to host communities through creating more jobs that people engage in as a secondary occupation, and raising demand for livestock products. Refugee inflow has a positive impact on diversification of livelihood activities as a secondary occupation and on commercialization of livestock products. Specifically, a 1 percent increase of the refugees’ presence<sup>5</sup> leads to a 2.7 and 15.9 percent increase in the diversification of livelihood activities as a secondary occupation and value of livestock product sale, respectively. It should be noted that this analysis is taking place during a period where refugees in Ethiopia were prohibited by law from seeking work outside designated camps. This has changed after 2019 because of the revised Ethiopian Refugee Law. These effects tend to be heterogeneous across regions and to a limited extent, vary depending on the gender of the household head. The negative effects tend to be concentrated in Gambella, a region that hosts most of the refugee population in Ethiopia and where the refugee population is as large as the population of the region. Overall, compared to women-headed households, households with a male head seem to benefit through increased diversification of activities as a secondary

> 4 Region refers to the administration level 1 from the Database of Global Administrative Areas (GADM). The nearest region to the refugee camp is identified as the one that has the shortest straight distance to the refugee camp among all neighboring regions in the major refugee source countries.

> 5 As explained above, refugee presence is the number of refugees (population) in the nearest refugee camp to the household location weighted by the household’s inverted distance to the camp.

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