Working Paper 668

Economies of Density versus Natural Advantage: Crop Choice on the Back Forty

Thomas J. Holmes | University of Minnesota, Federal Reserve Bank of Minneapolis
Sanghoon Lee

Revised June 23, 2009

We estimate the factors determining specialization of crop choice at the level of individual fields, distinguishing between the role of natural advantage (soil characteristics) and economies of density (scale economies achieved when farmers plant neighboring fields with the same crop). Using rich geographic data from North Dakota, including new data on crop choice collected by satellite, we estimate the analog of a social interactions econometric model for the planting decisions on neighboring fields. We find that planting decisions on a field are heavily dependent on the soil characteristics of the neighboring fields. Through this relationship, we back out the structural parameters of economies of density. Setting an Ellison-Glaeser dartboard level of specialization as a benchmark, we find that of the actual level of specialization achieved beyond this benchmark, approximately two-thirds can be attributed to natural advantage and one-third to density economies.

Published In: The Review of Economics and Statistics (Vol. 94, No. 1, February 2012, pp. 1-19)

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