Microdata Analysis of Japanese Farmers' Productivity: Estimating Farm Heterogeneity and Elasticity of Substitution among Varieties

Modern theories of trade and economic geography pay particular attention to the role of product differentiation under monopolistic competition in manufacturing, while agriculture is considered to produce homogeneous goods. By contrast, agribusiness studies shed light on active entrepreneurs who have high productivity and are engaged in product differentiation by creating new products in their niches. Given these two contradicting views of agriculture, we examine the incidence of farm heterogeneity and product differentiation. This study uses microdata of Japanese farmers to estimate their total factor productivity. We find that heterogeneity is relatively low in the horticulture, grain and soybean (excluding rice), and fruit farming sectors, and high in the livestock sectors. In addition, the degree of product differentiation is relatively high in the livestock sectors, and the elasticity of substitution is as high as three, which is similar to findings in earlier studies on agriculture and manufacturing.