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 elastic ity between nitrogen. fertilizer, and land, with larger industry-level values for the corn sector, This is accomplished with a micro-simulat ion model which identities twenty-three heterogeneous groups of corn F armers based on survey data for Indiana. After controlling for soil qu ality, slope, crop rotation, and natural nitrogen sources, considerabl e variation in fertilizer application rates remains. Model simulations indicate that the estimated substitution elasticity at the state leve l (1.15) is consistent with very low farm-level substitutability. The difference is attributable to compositional changes in the wake of rel ative price shocks. These compositional effects are potentially very i mportant but they are ignored in most policy analyses.