Inaccurate fertilizer content and its effect on the estimation of production functions

•We examine the estimation bias caused by inaccurate fertilizer content.•Types of uncertainty include constant, random, and household-specific uncertainty.•Negative fertilizer partial elasticity is mistaken as insignificant due to the bias.•The bias also leads to an overestimation of technical efficiency by 16% to 30%.

Discrepancy between the labeled content and the real content of fertilizer is a growing problem. It exists in many countries, such as Bangladesh, Cambodia, China, Nigeria, Tanzania, Vietnam, and more. We analyze in our article the effect of low quality fertilizer, which contains less nitrogen than is advertised on the packaging. We show that this could lead to bias in the estimation of production functions. Using panel data from the Hebei Province of China and the Monte Carlo simulation, we examine the magnitude of the bias across different levels of fertilizer quality under various scenarios of uncertainty. We find that ignoring the uncertainty leads to an overestimation of fertilizer's effectiveness. Depending on the scenarios of uncertainty, the bias could even switch the sign of fertilizer's partial elasticity.