The paper analyses technical change in Italian agriculture, focusing both on the effects of public R&D-extension investments and on the induced innovation hypothesis. A mixed parametric-nonparametric approach is used. First, in a multi-output framework, technical change is depicted in the form of 'netput augmentation' through a non-parametric general description of the production set. Then a parametric dynamic relationship between netput augmentation, public R&D-extension investments and changes in relative prices is specified. The empirical analysis shows that the main impact of public R&D and extension investment in Italian agriculture is on capital use and animal products. A crucial role is played by market mechanisms through induced innovation. Copyright 2000, Oxford University Press.