INDEX MODELS AND LAND ALLOCATION RECONSIDERED

In contrast with previous index model land applications, this article shows that the land allocation problem is a portfolio model with two c onstraints, namely, investable funds and land The two-constraint model implies a drastic reinterpretation of what previous studies have quan tified as divelsifiable and systematic risks in agricultural productio n. The article also argues that the constant marginal-rate-of-product- substitution (MRPS) technology implicit in financial portfolio models is unlikely to hold in a production context such as the land allocatio n problem, and that the index model must be modified accordingly. Farm -level data are used to illustrate and test the hypotheses advanced. E mpirical results indicate that most of the risk for corn and soybeans is diversifiable, and that corn and soybeans are characterized by decr easing MRPS. The MRPS effect is found to be large from an economic sta ndpoint and implies that crop diversification may be optimal, even for risk-neutral farmers.