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

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 a model of how a farmer plants adjacent fields under the farmer’s control. We find that planting decisions on a field are heavily dependent on the soil characteristics of adjacent 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. 0*Holmes, University of Minnesota, Federal Reserve Bank of Minneapolis, and NBER; Sanghoon Lee, Sauder School of Business, University of British Columbia. Holmes is grateful to NSF Grant 0551062 for support of this research. We are grateful for input from the edtior and the referees. We have benefited from the comments of seminar participants at the NBER agglomeration conference, University of British Columbia, the University of Minnesota, and the RSAI North American meetings. We are grateful to Julia Thornton for research assistance. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.