Nitrogen-Land Substitution in Corn Production: A Reconciliation of Aggregate and Firm-Level Evidence

In this paper we seek to reconcile low farm-level substitution elasticity between nitrogen, fertilizer, and land, with larger industry-level values for the corn sector. This is accomplished with a micro-simulation model which identifies twenty-three heterogeneous groups of corn farmers based on survey data for Indiana. After controlling for soil quality, slope, crop rotation, and natural nitrogen sources, considerable variation in fertilizer application rates remains. Model simulations indicate that the estimated substitution elasticity at the state level (1.15) is consistent with very low farm-level substitutability. The difference is attributable to compositional changes in the wake of relative price shocks. These compositional effects are potentially very important but they are ignored in most policy analyses. Copyright 1996, Oxford University Press.