Human Capital, Entrepreneurship, and Farm Household Earnings

Farm households in modern environments engage in multiple productive activities. In this paper we formulate and estimate a profit maximization model in which human capital enhances earnings through both activity-specific effects and across-activity factor allocation. Our purpose is to decompose these contributions. The model is estimated using Chinese household data that contain detailed activity information. We find that schooling and experience improve the allocation of family-supplied inputs between agricultural and non-agricultural uses, counting for 46 percent of their total returns. The evidence suggests that studies ignoring activity choice could substantially undervalue the role of human capital in development.