Diversification of Human Capital Investments in Rural Ethiopia

We investigate household-level diversification of human capital investments in a rural developing country setting. Returns to schooling and to the alternative, which includes acquisition of traditional agrarian knowledge, are uncertain. The theoretical model combines a portfolio-choice model with a human capital investment model. Diversification implies a negative relationship between education of the younger and the older sibling. Diversification is more important in more risk-averse households, and we use the interaction between sibling dependency in education and risk preferences to empirically test for diversification. Moreover, diversification is less important in credit-constrained households. The empirical analysis employs data on school entry of boys and girls in the rural Amhara region of Ethiopia. The results suggest diversification across brothers in households that are less credit-constrained.