What is this folder for?

It's the folder where user content is stored. It contains data like PSN games (dev_hdd0/game/GAMEID), DLCs, updates or game data (only for disc-based games). In dev_hdd0/home/*user_id* contains information about the installed trophies, user's savedata or RAP licenses (required for PSN games and DLCs).

Usually disc-based games install content into the hard disk to reduce loading times in the real hardware. However, in an emulator, it's almost useless, since a lot of PC hard drives are faster than the PS3 stock hard drive. IIRC, Gran Turismo 5 allows you to stop the installation of game data.