household may invest more in a low-productive sector in order to reduce income fluctuations if its production is negatively correlated with other income sources. If the household can reallocate labor after weather realization it will allocate labor from the most affected sectors towards the least affected sectors. For our thought experiment, it implies that the households withdraws labor from crop and environmental production and reallocates it to forest and livestock production, due to our biomass accumulation argument. It implies further that relatively more labor is withdrawn from crop production than non-forest environmental production and more labor is allocated to forest production than to livestock production because of the biodiversity argument. If more labor is allocated to wage work and other non-resource based production depends on the changes of labor productivity in these sectors. If more labor is allocated to forest extraction, forest income could potentially _increase_ , in spite of also being negatively affected in its productivity by the weather event. This will happen if the labor reallocation effect outweighs the income fall due to the direct damages from weather effects on forests (e.g. lower forest fruit and mushroom production, or less game availability). The response of other income sources to a negative agricultural shock will depend on its weather sensitivity. However, any weather shock that affects labor productivity in any sector adversely reduces total income and make the household worse off, but the extent of welfare losses will depend on how well the household can compensate the income shock by labor reallocation.

How well households can compensate for climate-related income losses depends, _inter alia,_ on the sensitivity of the natural ecosystem to the shock, the output elasticity of labor in environmental production, and its market integration. Households can better compensate income shortfalls from agriculture if the natural ecosystem is highly resilient, or if off-farm income options exist. The labor elasticity depends on the response of the natural ecosystem to increased extraction. Small or fragile ecosystems may soon become overexploited and entail small labor elasticities.

# 2.3 Hypotheses

From the conceptual framework above, as well as empirical results from other studies, we derive three specific hypotheses. First, from the case study literature, and specifically the quantitative results in the Vedeld et al. (2004) meta-study, we would expect that:

**_H1:_** _Households derive an income share of at least one-fifth from environmental sources, and the share of the poorest households exceeds that average._

For cautionary reasons, we are setting our expectations here slightly below the case-average of 22% found in Vedeld et al. (2004), given the methodological problems and possible selection biases involved. The testing of this hypothesis will obviously set the stage for the rest of the report, in terms of determining how important a weight environmental income will carry in household decision-making vis-à-vis climate related factors.

Second, in terms of adjustments in the composition of household income sources, we would expect that households use the environment for coping in times of important economic setbacks, including but not only from weather-induced, household-reported shocks:

**_H2:_** _Households self-reporting to have been hit by an economic shock will as a safety net significantly increase their environmental extraction._

If environmental extraction works as a safety net, we would expect that environmental income is increased to substitute for other income or asset losses, or to mobilize emergency cash (or in-kind) resources needed to deal with the exogenous shock (e.g. to pay for transport or buy medicines).

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