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We examine the relationship between investments in animal breeding and productivity growth on Wisconsin dairy farms using a control function approach. We incorporate farm‐level annual investment in breeding and genetics into the law of motion of productivity as in De Loecker (2013) to test the relationship between these investments and realized productivity. Our unique dataset also allows us to look at the effect of choosing bulls with high milk yield potential on productivity. Our results indicate that breeding investments made 3 years prior are associated with higher productivity of the current cohort. However, the farms with the highest level of productivity reap the lowest benefits from breeding investments, suggesting that there are diminishing returns to investing in genetics. When milk output is not quality adjusted, the contribution of breeding to productivity is undetectable, suggesting that breeding and investments in milk quality are related. We conclude that investments in breeding and genetics significantly contribute to dairy farm productivity, especially in terms of milk quality. [ABSTRACT FROM AUTHOR]