Valuing Product Innovation: Genetically Engineered Varieties in U.S. Corn and Soybeans

We develop and estimate a discrete-choice model of differentiated products for the corn and soybean seed industry in the United States to assess the welfare impact of genetically engineered (GE) crop varieties. We use a unique dataset, spanning the period 1996-2011, that contains rich information on the adoption of GE traits. Using a two-level nested logit model, we estimate that U.S. farmers are willing to pay a significant premium for GE traits, and this value has increased over time. Over the last five years of the sample, our results imply that farmers' average willingness to pay for glyphosate tolerance in soybeans was $24/acre/year. During the same period, farmers' willingness to pay for a common triple-stack in corn that includes two insect resistance traits and glyphosate tolerance was $35/acre/year. To compute overall welfare estimates, we evaluate counterfactual scenarios in which GE varieties are not available, with counterfactual non-GE seed prices predicted by a hedonic price equation. Counterfactual scenarios are adjusted to account for the fact that GE crop varieties crowded out non-GE varieties by the end of our sample. We estimate that GE innovations increased farmers' welfare by more than $14 billion over the period of study. We also find that the development and diffusion of GE traits increased U.S. corn and soybean seed industry revenues by nearly $23 billion over this period. Thus, seed firms have been able to appropriate the larger share of the ex post value of innovation created by GE technologies. Key Words: Discrete choice, Innovation, Nested logit, Product characteristics, Seed demand, Transgenic crops, Welfare JEL Codes