Human Capital, Entrepreneurship, and Farm Household Earnings

The allocation of resources between agriculture and non- agriculture is a central decision of a farm household. In this paper we formulate a profit-maximization model in which human capital enhances efficiency through both within-sector effects and across-sector allocation of quasi-fixed inputs. The model is estimated using Chinese household data that contain detailed activity information during a period of rapid growth in non-farm production. We find that schooling and experience improve the sectoral uses of household- supplied inputs, accounting for 49 percent of their total contribution to earnings. The evidence suggests that conventional estimates of human capital returns obtained within sectors would substantially undervalue the role of human capital in development