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The traditional sustainable livelihood framework assumes that livelihood capital has a "complementary" effect, and that combining capitals improves the adaptability of farmers. However, this framework disregards the possibility that the "substitution" effect in the conversion of livelihood capital increases the vulnerability of farmers' livelihoods. The difference between the two lies in whether livelihood capitals are mutually exclusive or mutually reinforcing, which can result in an increased adaptive capacity for farmers. In this study, structural equation modeling and fuzzy set qualitative comparison analysis were combined. Coastal villages in Shankou Town, Guangxi, China, were analyzed in a case study to identify the incentive and restrictive livelihood capitals affecting the improvement of farmers' adaptive capacity. Moreover, the "complementary" and "substitution" effects of incentive and restrictive livelihood capitals were explored. The results indicate the existence of a "complementary" effect among incentive livelihood capitals (i.e., material, social, human, and natural capitals), which improves farmers' adaptability. Moreover, material and social capital exert a strong "complementary" effect on other capitals. Psychological and financial capital, as limiting livelihood capitals that obstruct the improvement of farmers' adaptability, can replace both human and natural capital. When providing livelihood compensation for farmers in vulnerable areas, material and social capital with a strong "complementary" effect compensation should be prioritized, while capital with a "substitution" effect should only be compensated selectively. The priorities for policymakers are also determined to ensure both livelihood compensation and the optimal allocation of limited funds. Moreover, a reference is provided to improve the adaptive capacity of farmers in vulnerable areas. • There are not only complementary effects but also substitution effects among livelihood capitals. • Substitution capitals are mutually exclusive, increasing the likelihood of vulnerable livelihoods. • The substitution effect is the key in prioritizing livelihood compensation. • The addition of complementary capital portfolios improves farmers' adaptability. • Complementary capital should be compensated first. [ABSTRACT FROM AUTHOR]