Why better seeds reduce fertilizer use efficiency: Hybrid rice, fertilizer subsidies, and offsetting effects on nitrogen demand

Reducing nitrogen fertilizer use while sustaining crop yields remains a key challenge for sustainable agriculture in developing economies. This paper examines how hybrid rice adoption interacts with government fertilizer subsidies to shape nitrogen demand and rice production in China. Using reduced-form regressions that treat hybrid rice diffusion as a natural experiment, we show that hybrids lower nitrogen-use efficiency (NUE) yet increase fertilizer application, contrary to standard economic intuition. To explain this pattern, we develop a two-agent model in which farmers choose inputs to maximize profits while the government sets nitrogen subsidies to maximize equilibrium rice output. The model predicts that a decline in NUE induces higher subsidy rates, offsetting the reduction in nitrogen use that would otherwise occur. We test this mechanism through structural estimation of farmers’ profit functions using a novel county-level panel dataset (1981–2015) merged with genotypic information on 680 rice varieties. The results confirm that policy responses play a central role: absent changes in subsidies, inferior NUE traits in hybrid rice would have reduced nitrogen demand by 23.1% (approximately 6 million metric tonnes). Instead, induced subsidy increases lowered the effective price of nitrogen and largely offset the fertilizer-saving effects of these traits. The findings highlight the importance of aligning agricultural policies with technological innovation to achieve both productivity and environmental objectives. Online attendees: Zoom link will be included in confirmation email upon registration.