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Distributional Effects of Crop Insurance Subsidies
Abstract
This article investigates the distributional effects of the subsidized crop insurance program in the United States. An equilibrium
displacement model is constructed, linking the supply of disaggregate farm commodities with final consumer food demands. Using
state-specific data on farm commodity production, crop insurance payments, food expenditures, and federal tax payments, the
welfare effects of the removal of the premium subsidies for crop insurance are calculated for each state in the United States.
Results indicate that the removal of the premium subsidy for crop insurance would have resulted in aggregate net economic
benefits of $622, $932, and $522 million in 2012, 2013, and 2014, respectively. The deadweight loss amounts to about 9.6%,
14.4%, and 8.0% of the total crop insurance subsides paid to agricultural producers in 2012, 2013, and 2014, respectively.
In aggregate, removal of the premium subsidy for crop insurance reduces farm producer surplus and consumer surplus, with taxpayers
being the only aggregate beneficiary. The findings reveal that the costs of such farm policies are often hidden from food
consumers in the form of a higher tax burden. On a disaggregate level, there is significant variation in effects of removal
of the premium subsidy for crop insurance across states. Agricultural producers in several Western states, such as California,
Oregon, and Washington, are projected to benefit from the removal of the premium subsides for crop insurance, whereas producers
in the Plains States, such as North Dakota, South Dakota, and Kansas, are projected to be the biggest losers.
... Claassen et al., 2017;Shi et al., 2019) and on welfare (e.g. Smith et al., 2016;Lusk, 2017;Du et al., 2017), but analyses of the decision-making processes and explanatory factors of public expenditure on RM are still few in number. Understanding how budget is allocated across different policies can help design targeted policies to mitigate agricultural risks and improve their implementation at the local level. ...
... Smith et al. (2016) demonstrate that a large part of the welfare transfer generated by premium subsidies is captured by insurance companies and agents, increasing the spending of the federal government and de-facto subsidizing these companies. Lusk (2017) showed how removing the premium subsidies would have aggregate net economic benefits, with taxpayers being the main beneficiaries vis-à-vis farmers, but with a significant variation in welfare effects across states. Du et al. (2017) found that farmers are less likely to choose an insurance product if out-of-pocket premium expenditures increase, despite premiums are subsidized, because farmers place more emphasis on the anticipated gains deriving from avoiding the premium cost rather than on getting a later compensation after a hypothetical loss. ...
... Firstly, welfare is an important factor affecting funding allocation and expenditure. According to Lusk (2017) the adoption of agricultural subsidy programs affects aggregate welfare transferring funds to people living in the countryside or in rural communities, affecting the distribution of surplus among farmers, consumers and taxpayers. Du et al. (2017) argue that the US crop insurance subsidy program is viewed as an income transfer tool as farmers acquire subsidy transfers. ...
This paper analyses the factors influencing public expenditure on the EU’s Risk Management Toolkit comparing six types of regional-level spatial autoregressive models, and finding that there is a predominance of socio-economic factors over risk and agro-ecological factors in the allocation of budget. Higher expenditure occurs in more affluent regions and in areas with clusters of relatively high welfare. Conversely, regions with high agricultural value added and a greater presence of permanent crops spend less on the Risk Management Toolkit, indicating a trade-off with private risk management products (e.g. insurance) and on-farm practices. A higher intensity of CAP subsidies tends to reduce expenditure on the Risk Management Toolkit, indicating that the income stabilization capacity of direct payments might be an alternative to risk management and indicating a substitution between policies. Moreover, a strong spatial dependence of the regional expenditures indicates a key role of the higher-level institutional environment and political economy processes in the allocation of budget. The paper concludes deriving policy implications for the new CAP reform which is characterized by higher flexibility in deciding what policy instruments to implement at the territorial level.
... Okrent and Alston (2012) provided a useful contribution surrounding equilibrium displacement models by linking demand estimates to supply using input-output tables. This article uses the basic framework in Lusk (2017), who built on the Okrent and Alston (2012) framework. ...
... The model used here is the same as in Lusk (2017) except we use the demand flexibilities and demand shocks resulting from the estimates outlined in the previous section. Full details of the model are provided in Lusk (2017) and Okrent and Alston (2012), so they are not repeated here; the key differences in the model used here versus their models are fully described in Appendix B. ...
... It should be noted that producer welfare changes are accrued to all producers of the commodity in question and the suppliers of inputs to producers (Just, Hueth, and Schmitz, 2005). However, further delineating the incidence of these effects for the farming supply chain would require expanding the model to include the supply and demand of each input (Lusk, 2017). As a result, producer welfare estimates are presented with the understanding that changes are aggregated to capture upstream firms in addition to farmers. ...
This research seeks to determine effects of rising interest in gluten-free foods on U.S. retail food demand and, ultimately, producer and consumer welfare. Increased gluten-free interest led to a modest reduction in cereals and bakery demand and increases in meat, alcoholic beverages, and food away from home demand. Combining estimated effects with an equilibrium displacement model suggests the reduction in cereal and bakery demand decreases wheat and barley producer profits by US$7.2 million/year. After accounting for positive demand impacts on other products, results indicate wheat and barley supply is redistributed away from food production into animal production, increasing wheat producer welfare.
... The positive impact of insurance on the development of the agricultural sector of the economy and the protection of farmers' property interests in the event of unforeseen events is mentioned in many studies. In particular, the objects of research are processes related to the formation of insurance's ability to combine and neutralise risks (Komadel et al. 2018), demand for insurance services, (Santeramo et al., 2016), financial and economic relations between the insurance market stakeholders (Ivashkiv et al., 2021) pricing and subsidies (Lusk, 2017), government regulation and institutional support (Shibaeva & Baban, 2020). ...
... This opinion is shared by Aleskerova (2015); Siwedza & Shava (2020); Ivashkiv (2021); Raimondo (2021). Paying tribute to the best practices of researchers from different countries of the world, the authors of the study support the scientific position on the validity of a gradual increase in the amount of state subsidies in the field of agricultural insurance (Slobodyanuk, 2016;Lusk, 2017;Russo, 2022), the need to diversify services in the insurance market (Yanyshyn, 2019;Siwedza & Shava, 2020). At the same time, issues related to the scientific substantiation of the role of insurance in the system of ensuring sustainable land use remain controversial (Goodwin & Hungerford, 2015;Claassen et al., 2017). ...
An urgent problem today is the reproduction of a sustainable ability to meet the demand for food products in different countries of the world. The solution to this global problem lies in the search for optimal financial and economic tools for timely counteraction to agricultural risks. Many years of international experience prove that such a tool is insurance. The purpose of the study is to conceptualise the mission of international agribusiness insurance, specify modern challenges, and identify opportunities for Ukraine. The methodology of this study was based on the use of various methods, in particular: abstract and logical, epistemological, comparative, structural and functional, modelling, formalisation, induction and deduction, regression and system analysis. The uniqueness of insurance lies in its ability to accumulate the necessary financial resources and distribute them to the needs of compensation for losses in the case of insurance events distributed in space and time. Consequently, the conducted research is aimed at substantiating the mission of international agribusiness insurance, identifying current challenges and existing opportunities in Ukraine. The main advantages and disadvantages of various models of interaction of stakeholders in the international agricultural insurance market are established. The paper highlights the world experience in positioning classic and index insurance products on the market. It was found out that the current level of agribusiness insurance in Ukraine does not correspond to its potential opportunities. Based on the parameters of the constructed regression model, it is established that the basis for further expansion of insurance coverage of agricultural risks is an increase in the number of concluded and renegotiated agricultural insurance contracts, an increase in the liability limit (insurance amounts) of companies, ensuring actuarial balance, and an increase in the amount of state subsidies. The practical implementation of these measures should be considered in the context of food security at the regional, national, and global levels
... The U.S. federal crop insurance is a major farm policy aimed at providing risk protection/ reduced risk exposure to agricultural producers [1,2]. A key component of this policy is the provision of multiple contract options and subsidies that reduce the cost of insurance to agricultural producers [3][4][5][6]. Premium subsidies accounted for $6.26 billion in government outlays in 2019, with $2 billion being applied to coverage levels of 80% and higher [7]. While the government has justified the use of premium subsidies as a necessary means of increasing producer participation in crop insurance [4,[8][9][10][11][12][13][14], many have argued that premium subsidies are just another means of income redistribution from taxpayers to producers [5,6,[15][16][17]. ...
... Premium subsidies accounted for $6.26 billion in government outlays in 2019, with $2 billion being applied to coverage levels of 80% and higher [7]. While the government has justified the use of premium subsidies as a necessary means of increasing producer participation in crop insurance [4,[8][9][10][11][12][13][14], many have argued that premium subsidies are just another means of income redistribution from taxpayers to producers [5,6,[15][16][17]. As pointed out by an anonymous reviewer and many of the cited studies, key reasons behind the government objective of increased producer participation in crop insurance have been a desire to reduce adverse selection, increase the accuracy of premium rates, and eliminate ad-hoc disaster payment programs. ...
This study develops a novel framework of heterogeneous producer attitudes towards risk to analyze different, stated and revealed, roles of crop insurance premium subsidies and underlying policy objectives of the government. The analysis reveals a strong connection and a complementarity between the roles of premium subsidies in increasing producer participation in crop insurance, inducing a desired separating equilibrium in the presence of asymmetric information, and transferring income to agricultural producers participating in the program. Developing an alternative design of premium subsidies that can achieve the stated government objective of increased producer participation and induce any desired separating equilibrium at significantly reduced costs, our study rejects the idea that the income redistribution taking place under the current policy design is necessary for increasing producer participation in crop insurance. Indeed, the current policy design reveals that premium subsidies are either a means of income redistribution or a policy failure.
... To the best of our a Laboratoire Études et Recherches Économiques (SMART-LERECO), Institut National de la Recherche Agronomique (INRA), Rennes, France (e-mail: alexandre.gohin@inra.fr). knowledge, Lusk (2017) is the unique and recent exception. He develops a Partial Equilibrium (PE) framework absent any market failures, with no risk aversion and assumes that crop insurance subsidies are similar to output subsidies. ...
... However, the standard GTAP model is a static CGE model without explicit risk modelling, such as the explicit measurement of farmers' risk attitude, insurance premiums paid by the farmer and the eventual indemnities that they receive in case of losses. By starting with this widely used CGE model, we are also close to the only recent macroeconomic analysis focused on crop insurance by Lusk (2017) and can test its robustness. More importantly, this CGE model serves as a benchmark to a more elaborated version where the risk attitude of farmers and insurance programs are introduced. ...
... 12 Subsidizing agricultural insurance premiums offsets the negative impact of adverse selection and may therefore result in higher farm production by encouraging participation in the insurance plan. However, the AgriInvest program, in which the government matches producer contributions to a savings account, may be more of an income support program than a risk management tool (Lusk 2017). 13 The efficiency argument for regional development programs is that depopulation will require public infrastructure (schools, hospitals) to be rebuilt elsewhere. ...
... 12 Subsidizing agricultural insurance premiums offsets the negative impact of adverse selection and may therefore result in higher farm production by encouraging participation in the insurance plan. However, the AgriInvest program, in which the government matches producer contributions to a savings account, may be more of an income support program than a risk management tool (Lusk 2017). 13 The efficiency argument for regional development programs is that depopulation will require public infrastructure (schools, hospitals) to be rebuilt elsewhere. ...
... It is followed by better post-harvest management practices. For an sustainable production (Lusk, 2017) and meeting economic sustainability innovation is an important drivers leading to productivity growth (OECD, 2013). Although innovation is a complex process but plays an important role in growth ( van Galen and Poppe, 2013) of a sector focusing on profitability, productivity and market orientation (Doris and Fiona, 2019). ...
The importance of millet in the present ecosystem as a mitigating tool towards planet, people and business is realised across all stakeholders in the agriculture and agribusiness system. Farmer Producers Companies are the new economic enterprises evolved to strengthen the collective efforts of marginal and small farmers. Sustainability is an important pillar in the integration and transformation of millet based enterprises to a sustainable business unit among the farmers group in the farmer producers company. Considering the emerging importance of millets to the present climate stress situation and evolution of Farmer Producers Company, the present study was conducted in the western undulating zone of Odisha state, i.e., Kalahandi. The study is based on survey data brought out of a structured interview schedule. A total of 312 sample households were interviewed among four FPCs in different blocks of the district. Following two important research questions were raised to qualify the subject of the study: What are the factors responsible to undertake millet based enterprises among the farmers within the context of the study? What are the important sustainability factors that determine an impact on farmer income? The study found that value addition and innovations are the important sustainability factors that create an impact on farmer income. Collaboration was also found significant but not to the extent. Further age, marital status, family support, financial stability, scale of operations were the internal factors and policy governance and public relations as external factors that drives farmers' decision to undertake millet based enterprises among the FPCs. The Odisha Millet Mission initiative has set to be a driving force across the production and post-production activities to strengthen and enhance the eco-environmental sustainability.
... Agricultural insurance, as a critically vital mechanism for agricultural risk management, has been broadly applied and promoted on a global scale. A plethora of academic studies have unveiled the profound impact of agricultural insurance on farmers' anticipated profits (Lusk, 2017). More notably, the presence and implementation of agricultural insurance might further shape and modify farmers' economic behaviors and decision-making methods (Ma et al., 2021). ...
This study is dedicated to exploring and establishing a theoretical framework for the impact of agricultural insurance on farmers’ green lifestyles. By thoroughly analyzing existing literature, this paper reveals the dual pathways through which agricultural insurance influences farmers’ behavior: one affects production activities, and the other affects lifestyle choices. Drawing on the Stimulus-Organism-Response (SOR) theory, the study elaborates in detail the incentive mechanisms of agricultural insurance, farmers’ cognition of green practices, and how these elements work together to guide a transformation in farmer behavior. This process systematically demonstrates the theoretical logic and pathways through which agricultural insurance promotes the transition to green lifestyles among farmers. Additionally, the study provides a preliminary description of the questionnaire design and its role in supplying foundational data for empirical analysis. The paper posits that agricultural insurance harbors an intrinsic mechanism to induce farmers toward greener lifestyles. We anticipate that this research will bring new perspectives to the field of agricultural insurance and contribute new dimensions to the theoretical framework of behavioral insurance.
... The distribution of government subsidy to producers has been long studied. In the U.S. agricultural sector, the subsidy programs play a vital role in supporting farm income and welfare (Lusk, 2017;Whitaker, 2009), and ensuring sustainable production and export (Fisher & de Gorter, 1992;Tong et al., 2019). The total outlays for 2023 are estimated at $209.3 billion (USDA, 2023c), and government payments constituted approximately 20% of net farm cash income between 2016 and 2021 (USDA, 2023a). ...
... economic, environmental and social, the existing literature focused more on environment. 2. Regardless of the theoretical links that have been proposed between innovation, value addition, risk, and collaboration with agriculture in the literature that currently exists [7], [36]- [40], there is a paucity of scientific empirical evidence to support these relationships in ensuring agricultural sustainability. 3. The body of knowledge is not enriched enough to address the question of why FPCs fail to scale up and persist even after their existence within the system for more than a decade. ...
Agriculture, being the important sector in Indian economy in terms of absorbing more than half of the total workers, continues to be less remunerative. The marginal and small farmers constitute around 86% of the total farmers. They are mostly unorganized and integrated with a lack of supportive environment in terms of institutional support, infrastructure, production ecosystem, access to on time resources and effective coordination with stakeholders. Farmer Producers Company (FPC), the latest version of farmer institution in India, has been developed to organize the marginal and small farmers, and enhance their capacity to multiply their income through agricultural sustainability. With this background, the present paper attempts to answer the following questions: what is the status of agriculture with a sustainability perspective in FPC context; and what are the unique practices (innovation, value addition, collaboration, risk coverage and institutional governance) adopted by the better performing FPC to attain agricultural sustainability. The study was conducted in a district (Kalahandi) in Odisha with a higher number of FPCs. It was found that none of the FPCs follows the risk coverage mechanisms. However, the relatively better performing FPC was found with the practices of value addition, innovation, collaboration and institutional governance. The bivariate correlation of all these facilitating variables with agricultural sustainability index was found to be significant. However, the extent of relationship between any one of these variables and agricultural sustainability index was found to be insignificant when we controlled the other facilitating variables. It is inferred that all the facilitating variables, viz. innovation, value addition, collaboration, institutional governance along with risk coverage are important when they are implemented simultaneously to ensure better agricultural sustainability scenario.
... Within the U.S. and the FCIP, a large literature has estimated the elasticity of demand for crop insurance with many existing studies characterizing demand as being inelastic (Barnett et al., 1990;Bulut and Hennessy, 2021;Calvin, 1990;Coble et al., 1996;Gardner and Kramer, 1986;Goodwin, 1993;Goodwin and Kastens, 1993;Hojjati and Bockstael, 1988;Maisashvili et al., 2020;Yi et al., 2020). This, in turn, has been used to fuel perennial arguments focused on premium reductions as a potential cost-saving measure for the FCIP (Barnaby and Russell, 2016;Bekkerman et al., 2019;Congressional Budget Office [CBO], 2020; Glauber, 2013;Goodwin and Smith, 2013;Lusk, 2017;Smith et al., 2017; United States Government Accountability Office [GAO], 2014). However, the results drawn from the bulk of existing literature may not necessarily generalize to the modern policy era since most existing studies are based upon historical iterations of the FCIP which offered notably different insurance products compared to what is available today (post-2000) [see Fig. 1]. ...
Premium subsidies are a common policy tool to promote crop insurance participation in many countries. However, the relationship between subsidies and demand is not entirely obvious given the variation in the use of subsidies and crop insurance participation within the international crop insurance landscape. Focusing on the U.S. Federal Crop Insurance Program (FCIP) demand is modeled as a system of equations representing decisions at the intensive [coverage level] and extensive [net insured acres] margins. The model makes use of an identification strategy that leverages exogenous variation in government-set pricing policy to address potential sources of endogeneity. Applying the model to over one million insurance pool level FCIP observations spanning two decades (2001–2022) suggest an inelastic response at both extensive and intensive margins to changes in producer-paid premium rates with the response to premium rates becoming increasingly more elastic as subsidies decrease. These estimated elasticities are on the low end compared to previous literature, however, significant heterogeneity across commodity, production practices, policy type, and location are observed suggesting subsets of producers are likely to respond to changes in the cost of insurance in different ways.
... Many authors point to the superior development of farm insurance in the United States. However, Lusk (2017) explains that the federal crop insurance program in the United States operated much like a pilot program from its inception in the 1930s until the Federal Crop Insurance Act of 1980 was passed (USDA, RMA). Participation increased following the passage of the 1980 Act, but the number of insured acres did not increase substantially until after the Federal Crop Insurance Reform Act of 1994 was passed. ...
Purpose
The purpose of this paper is to analyse the association between farm/farmer characteristics and unsubsidized farm insurance premium expenditure in Ireland. The distribution of farm insurance expenditures is wide, and it is important to understand the extent to which individual factors influence demand for different levels of insurance premium.
Design/methodology/approach
The quantile regression approach and farm accountancy data from the Teagasc National Farm Survey are used to model the association between farm/farmer characteristics and farm insurance demand in Ireland.
Findings
Asset values (livestock, buildings and machinery) are positively associated with total insurance expenditure. Both forestry area and crop area are significantly associated with farm insurance expenditure with a stronger influence on the middle and upper part of the distribution. The interaction between farm income and farmer age is positively associated with insurance expenditure pointing to the importance of farm income protection.
Research limitations/implications
The research is mainly concerned with insuring against substantive risks, which are capable of threatening the asset base and continuation of the farm business. Future research can integrate questions in relation to farm safety and farmer health with research on the economic survival of the farm business.
Practical implications
Farmers in Ireland adopt unsubsidized farm insurance as a risk management tool. This situation is relevant to other EU member states including Belgium, Denmark, Germany and Sweden. The findings can be used to inform stakeholders and policymakers about the relative impact of different factors on insurance expenditure.
Originality/value
Previous research has typically focused on the linear relationship between farm/farmer characteristics and insurance demand without accounting for variability across the size distribution. This research is based on the quantile regression approach where the association between farm/farmer characteristics and farm insurance expenditure can be assessed at different points of the distribution.
... This makes these insurance policies more accessible to farmers; therefore, more farmers are interested in insuring their crops. Lusk [13] examined the effect of reducing or eliminating subsidies for crop insurance in some US states. The results showed that there were benefits in some countries from the abolition of subsidies, while in other countries there would be losses among the farmers. ...
Crop insurance is used to reduce risk in agriculture. This research is focused on selecting an insurance company that provides the best policy conditions for crop insurance. A total of five insurance companies that provide crop insurance services in the Republic of Serbia were selected. To choose the insurance company that provides the best policy conditions for farmers, expert opinions were solicited. In addition, fuzzy methods were used to assess the weights of the various criteria and to evaluate insurance companies. The weight of each criterion was determined using a combined approach based on fuzzy LMAW (the logarithm methodology of additive weights) and entropy methods. Fuzzy LMAW was used to determine the weights subjectively through expert ratings, while fuzzy entropy was used to determine the weights objectively. The results of these methods showed that the price criterion received the highest weight. The selection of the insurance company was made using the fuzzy CRADIS (compromise ranking of alternatives, from distance to ideal solution) method. The results of this method showed that the insurance company DDOR offers the best conditions for crop insurance for farmers. These results were confirmed by a validation of the results and sensitivity analysis. Based on all of this, it was shown that fuzzy methods can be used in the selection of insurance companies.
... Ricome et al. [34] suggested insurance subsidies may be not the best use of financial resources, while lower credit rates and fertilizer subsidies can improve the utilities of farmers significantly. Although the absence of premium subsidies decreases the surplus of agricultural producers and the surplus of consumers, resulting in an unnecessary loss of economic efficiency, the premium subsidy system should also be used with caution [49]. As MDII in China is still in its initial stage, insufficient supply and demand make the government subsidies essential, otherwise, MDII cannot survive in its infancy [50]. ...
Designing an optimal subsidy scheme for marine disaster index insurance (MDII) for households in coastal areas of China remains a managerial challenge. The issue of subsidies for disaster insurance has received extensive research attention, but extant studies are confined to the issue of whether to subsidize, lacking focus on how and how much to subsidize. In the existing marine disaster index insurance pilots in China, there are varying levels and scales of subsidies in spite of premium subsidies. To design an optimal subsidy scheme for marine disaster index insurance in China, this paper proposes an optimal insurance model of marine disaster index insurance with government subsidy. Excluding the behaviors of the policyholders and insurance firms, the model captures the behaviors of the subsidy scheme from the government. Furthermore, employing the storm surge disasters, the optimal trigger scheme and subsidy scheme are designed and estimated. The results recommend that the optimal subsidy ratio for MDII in China needs to be at least 92.54%. Moreover, this value increases when there are more potential victims of marine disasters who choose to insure MDII, while the total subsidy decreases. Evidently, the subsidies for pilots of MDII in China are inadequate to meet the conditions for operation currently, which explains the dilemma of the MDII in China’s pilots. These findings provide theoretical evidence for the optimization of the MDII in China.
... That leads to the negative effect of agricultural insurance policies. Lusk [9] suggested that the governments formulate an agricultural insurance subsidy system prudently; Lusk then draws a conclusion that crop insurance subsidies will reduce farmers' income and social welfare, based on the study from America over the past ten years. Glauber and Collins [10] found that insurance subsidies distort the structure of planting crops. ...
With the rise and popularization of the concept of green sustainable development, green income growth of agricultural insurance policies has attracted wide attention. Whether green income growth can be achieved has become an important criterion for measuring an agricultural insurance policy. In this context, this paper attempts to test whether the agricultural insurance policy achieves green income growth. Based on the panel data of 31 provinces (the research sample of this paper selects 31 provincial-level units (province for short) in China, including 22 provinces, 5 autonomous regions and 4 municipalities directly under the central government. Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan Province are not included in the research sample) from 2009 to 2020 in China, this paper empirically evaluates the triple-effect of total cost insurance pilot program (TCI) on farmers’ income, environment and public health by employing a difference-in-difference model (DID). The results show that TCI increases farmers’ income, but deteriorates the environment and residents’ health without achieving green income growth. In the analysis of heterogeneity, compared with central and western regions, farmers’ income is more likely to increase in the eastern regions. However, environmental pollution is more severe, and residents’ health deteriorates more, in eastern regions. In addition, the positive effect of TCI on farmers’ income and the deterioration of residents’ health is more obvious in areas with a higher degree of damage, while the negative effect of TCI on the environment is more obvious in areas with a lower degree of damage. Furthermore, the mechanism analysis shows that TCI not only promotes the increase in farmers’ income through insurance density, but also affects the environment and residents’ health through straw burning. Therefore, the government should raise the subsidy standard for farmers to use straw-processing equipment and also to implement differentiated subsidies in regions with different levels of economic development and areas with different degrees of damage.
... Crop insurance represents one of the most investigated subjects in agricultural economics. There is a large amount of literature addressing crop insurance demand (Enjolras et al. 2012;Santeramo et al. 2016), pricing and subsidies (Skees et al. 1997;Lusk 2017), impact on farming decisions (Ahsan et al. 1982;Nelson and Loehman 1987;Ramaswami 1992;Mieno et al. 2018) and moral hazards (Horowitz and Lichtenberg 1993;Quiggin et al. 1993;Smith and Goodwin 1996). Additionally, there is wide range of literature examining the effect of crop insurance on input use (Wu 1999;Goodwin et al. 2004;Möhring et al. 2020aMöhring et al. , 2020b and input demand under crop insurance (Ramaswami 1993;Babcock and Hennessy 1996). ...
This article aims to evaluate the effect of insurance on production, technical efficiency, and input use of Italian specialised-quality grape growers. A panel instrumental variable stochastic frontier approach is applied over the years 2008–2017 using data from the Farm Accountancy Data Network. The results show the requirement to correct for the endogeneity that stems from insurance adoption. Insurance has an enhancing effect on production and efficiency and reduces the use of intermediate inputs. It suggests that insurance helps to diminish the risk-averse farmers’ suboptimal input use due to the presence of uncertainty. Crop insurance leads risk-averse farmers to behave as if they were risk neutral and employs the profit-maximising input vector. Therefore, by reducing the risks linked to the uncertainty of outcomes, crop insurance leads grape growers to go in the direction of profit maximisation.
... Agricultural insurance can play a role in hedging risks when the grain yield or the price of grain falls [4] and compensate farmers for losses through a compensation mechanism. AISP increases the expected value of the agricultural production income [5]. Yu [6,7] found that the subsidy policy increases farmers' income by expanding agricultural planting areas through empirical research. ...
The agricultural insurance subsidy policy (AISP) encourages farmers to expand production scale by mitigating production risks. Under the high-input production patterns of traditional agriculture, the implementation of AISP is conducive to increase farmers’ income, but it also leads to the destruction of the agricultural environment. Achieving agricultural green development (AGD) has been hindered in China. In this context, this paper attempts to analyze the impact of AISP on farmers’ income and the agricultural environment. Based on the panel data of 316 prefecture-level cities from 2003 to 2012 in China, this paper empirically tests the effects of AISP by employing methods such as time-varying difference-in-difference (DID). The results show that AISP has significantly promoted the growth of farmers’ incomes but has negatively impacted the agricultural environment. Furthermore, the mechanism analysis shows that the policy effects are realized by affecting the quantity of main productive fixed assets (Mpfa) and grain sown area per capita (Gsa). In addition, the policy effect is heterogeneous in different regions. Therefore, the government should appropriately raise the subsidy standard for farmers who adopt environmental-friendly production patterns. At the same time, the government should give more subsidies to the large grain-producing areas.
... Piggott et al. (1995), Kinnucan, Xiao, and Yu (2000), and Cranfield (2002) extended the EDM to analyze the impact of advertisements on different multistage agricultural industries. EDMs have been used to investigate implications of wheat breeding programs (Nogueira et al., 2015), country of origin labeling (Brester et al., 2004;Hahn et al., 2019), biological productivity growth in the crop sector (Takeshima, 2009), animal disease outbreaks (Pendell et al., 2007;Holderieath et al., 2018), drought in the crop sector (Bauman et al., 2013), and insurance subsidies (Lusk, 2017). With advances in algorithm programing, Harrington and Dubman (2008) combined the EDM with mathematical programing models to analyze sector-wide agriculture at the U.S. Department of Agriculture-Economic Research Service (USDA-ERS). ...
This paper assesses the distributional consequences of technical changes that improve the efficiency of land and of other inputs in a multifactor crop‐production system. We introduced an equilibrium displacement model (EDM) by using the specification of a factor‐augmenting approach. Given the uncertainty about the EDM parameters, a Monte Carlo simulation is used to produce a distribution of possible return measures. We found that land suppliers (likely farmers) receive a larger share (73%) of total benefits from the adoption of land‐technical change than they do from the adoption of other input technologies. Each input supplier receives a larger share of total benefits from technical change in her own input. However, this result is sensitive to the value of the parameters, especially the value of the elasticity of substitution. We applied the EDM to the case of no‐tillage (NT) to provide insight into how the aggregate return from the adoption of NT was distributed among different groups on the Canadian Prairies. The results of this study can be used by policymakers and funding agencies in order to influence landowners and farming communities to adopt environmentally sound land technologies to achieve both greater agricultural productivity and sustainability.
... Subsidization of private market players may facilitate rent-seeking behavior-efforts to capture larger shares of tax dollars devoted to the programespecially in the settings of asymmetric information, moral hazard, and adverse selection which typically characterize crop insurance markets (Glauber, 2012;Lusk, 2016;Smith, Glauber, and Dismukes, 2016). Ker and Ergun (2007) show that insurance companies can use private information in the reinsurance market to generate excess returns, which go uncaptured by the government's premium-setting mechanism. ...
The United States Department of Agriculture, Risk Management Agency (RMA) partners with private insurance companies to deliver the federal crop insurance program through agents who sell policies directly to producers. The government subsidizes producers in the form of premium discounts and reimburses private insurance companies for administrative and operating (A&O) costs. The government provides further assistance to the industry by offering a cooperative reinsurance agreement that reduces loss exposure for insurance companies (Appel and Borba, 2009). Subsidization of private market players may facilitate rent-seeking behavior—efforts to capture larger shares of tax dollars devoted to the program— especially in the settings of asymmetric information, moral hazard, and adverse selection which typically characterize crop insurance markets (Glauber, 2012; Lusk, 2016; Smith, Glauber, and Dismukes, 2016). Ker and Ergun (2007) show that insurance companies can use private information in the reinsurance market to generate excess returns, which go uncaptured by the government’s premium-setting mechanism. Similarly, Coble, Dismukes, and Glauber (2007) show that crop insurance companies take individual policyholder characteristics into account when allocating policies to reinsurance funds—ceding high risk policies to the government and retaining safe policies for themselves. Rejesus et al. (2004) consider the role of the selling agent and find evidence of collusion between crop insurance agents, producers, and insurance adjusters. Our work extends the crop insurance literature by investigating the potential for selling agents to influence producers’ choices of insurance coverage.
... Subsidization of private market players may facilitate rent-seeking behavior-efforts to capture larger shares of tax dollars devoted to the program-especially in the settings of asymmetric information, moral hazard, and adverse selection that typically characterize crop insurance markets (Glauber,2012;Lusk, 2016;Smith, Glauber, & Dismukes, 2016;Wu, Goodwin, & Coble, 2019). Although a considerable amount of work has identified producer rentseeking behavior in crop insurance (Coble, Knight, Pope, & Williams, 1997;Just, Calvin, & Quiggin, 1999;Makki & Somwaru, 2001;Roberts, Key, & O'Donoghue, 2006;Skees & Reed, 1986;Smith & Goodwin, 1996;Walters, Shumway, Chouinard, & Wandschneider, 2015), little attention has been given to the behavior of other crop insurance participants. ...
We examine how competition among crop insurance agents affects coverage choice in the federal crop insurance program. Agents may influence producers’ insurance decisions to maximize their total compensation. We develop a theoretical model of producer‐agent interaction to examine how loss potential, agent compensation mechanisms, and market competition affect the coverage level selected. Using crop insurance unit level datasets from five states, we find evidence that agent market concentration and agents’ market share matter in the insurance coverage decisions of producers but that the economic significance of the influence is relatively small. Agent influence over coverage level, premium, and liability choice is generally positive but inconsistent across states, which may be attributable to differences in loss risk and agent compensation mechanisms.
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... First, Solo [30] took Mexico, Sri Lanka, Brazil, the United States, and Bolivia as examples and found the positive role of government in developing inclusive finance. Second, Devarajan et al. [31] claim that the actions of the government may be ineffective or even reduce social welfare [32]. This paper holds that the "visible hand" of the government has the ability to create an excellent financial ecology, provide convenient investment and financing policies and systems, build a platform for agriculture-related subjects and capital suppliers, and mobilize various elements and resources of the financial market. ...
Inclusive finance is an important development direction in the future of finance. The development of inclusive finance in China’s rural areas has provided valuable experience as well as exposing the various limitations of sustainable development. One of the key reasons for such limitations is the existence of cooperative resistance from multiple parties in the finance system. In this study, relevant data from the World Bank Inclusive Finance Database 2011–2017 and the CBRC Website were selected to analyze the current development level of inclusive finance in China in order to perform longitudinal time and horizontal international comparisons. The article summarizes the Chinese experience with inclusive finance and points out the dilemma of sustainable development. Then, based on the new perspective of synergy, the article breaks down financial institutions by type and provides an analysis of the cooperative resistance among the three major parties considering their behavioral motivations. Finally, we put forward the corresponding countermeasures to the dilemma of the sustainable development of inclusive finance in rural China by numerical simulations.
... As previously mentioned, most crop insurance products that are offered in the USA receive generous federal subsidies. Our concern here is not with any welfare losses and redistributions arising from the presence of subsidies; see, for example, Wright (2014) or Lusk (2016). Taking subsidies as given, we ask what implications might flow from our observations on premium rate determination in Webster County. ...
In this paper, we investigate whether the yield insurance premium rates given by the US Department of Agriculture's Risk Management Agency are actuarially fair by comparing the conditional yield density inferred from premium data with the conditional yield density inferred from yield data. A procedure is developed to estimate the conditional yield density by using premium data through partial derivatives of the premium rate function, as fitted by penalized bivariate tensor product B‐splines. We study the asymptotic properties of partial derivatives of a penalized bivariate tensor product B‐spline estimator and provide variance estimates. The conditional yield density inferred from premium data and its variance estimator are evaluated through simulation studies. The procedure is also applied to a crop insurance data set from the state of Iowa to examine the actuarial fairness of the premium rates. On average, premium rates are close to our estimates and this is true for each coverage level. However, premiums for low productivity land are generally too low whereas those for high productivity land are generally too high. Even after subsidies, premiums for the more productive land are generally substantially higher than are our estimates of the corresponding actuarially fair rates.
Using a large‐scale, individual‐level administrative data set for 2008–2021, we document the inequality in farm program payments across all recipients in the U.S. By examining the relationship between within‐county inequality and demographic characteristics of farmers in a county, we find that there is a positive association between the share of Black operators and within‐county inequality. We also provide suggestive evidence that a substantial portion of racial and gender disparities in farm payments are associated with crop production characteristics. We then utilize name information in farm payment data to infer the race and gender of individual payees. The analysis using approximately 4.9 million payee‐by‐year observations and predicted race and gender information of those payees shows that payments are lower for producers who are Black, Hispanic, and female. Our study provides a comprehensive empirical analysis of the equality of farm subsidy distribution covering most U.S. farm payment programs at a granular level over time. We also provide an empirical approach of utilizing name information from the administrative data that opens up more possibilities for racial and gender inequity research in agricultural economics.
In smart farming, agricultural technology providers (ATPs) wield market power in both the upstream (data collection/aggregation) and downstream (crop production) markets. Using a two-stage Muth model, this study assesses benefit distribution from ATPs' data-driven services in smart farming. Results show limited farmer returns from data sharing, questioning policymakers' data value focus. While data-driven services offer notable benefits, ATPs capture a significant share due to market power. Addressing ATP market power promotes equitable rent distribution, but perfect competition risks ATPs' sustainability and R&D incentives, presenting a policy challenge for smart farming outcomes. K E Y W O R D S data-driven services, market power of agricultural technology providers, Muth model, smart farming J E L C L A S S I F I C A T I O N C63, D33, D43, D60, L11, L13, O33, Q16, Q18
We utilize over 190,000 historical farm-level dryland row-crop yield observations (corn, sorghum, soybeans, and winter wheat) spanning over 7000 Kansas farms from 1973 to 2018 coupled with agroclimatic variables to assess the performance of a broad range of weather-and area-based insurance products. Results showed substantial levels of basis risk across agroclimatic-based indices, limited ability to reduce income variability under fair pricing, and underperformance relative to area-based yield products. Growth-stage specific heat indices for corn and soybeans may offer an effective risk management tool. Implications in the context of current agricultural policy initiatives and climate change adaptation are discussed.
Crop revenue insurance is unique, because it involves a guarantee subsuming yield risk and highly systematic price risk. This study examines whether crop insurers could use options instead of, or in addition to, assigning policies to the Commercial Funds of the USDA Federal Crop Insurance Corporation (FCIC) as per the Standard Reinsurance Agreement (SRA) to hedge the price risk of revenue insurance policies. The behavioral model examines the optimal hedge ratio for a crop insurer with a book of business consisting of corn Revenue Protection (RP) policies. Results show that a mix of put and call options can hedge the price risk of the RP policies. The higher optimal hedge ratios of call options as compared to put options imply that the risk of increased liability due to upside price risk can be hedged using options better than downside price risk. This study also analyzed the combination of options with the SRA at 35, 50, and 75% retention levels. The zero optimal hedge ratios at each retention level and the negative correlation between RP indemnities and the option returns when the crop insurer mixed options and SRA suggest that the purchasing of options provides no additional risk protection to crop insurers beyond what is provided by the SRA despite retention limits.
Previous studies have shown a strong correlation between topographic/soil features and agricultural production; however, linkages between these features and agricultural insurance products are scarce. Agricultural insurance is an ever‐growing means of governmental support for producers globally. However, failure to set insurance premiums that accurately reflect risk exposure can lead to low participation rates and/or adverse selection. The U.S. federal crop insurance program partly guards against this at the farm level by inducing pricing heterogeneity via a rate multiplier curve, which does not consider topographic/soil information. We develop a method for econometrically incorporating this information into existing rating procedures used by the Risk Management Agency (RMA). The empirical application leverages 149,267 farm‐level observations of Kansas producers across four dryland crops (corn, soybean, sorghum, and wheat), spanning forty‐six years, and matched to fine‐scale topographic/soil features. The results suggest that incorporating these features does improve the prediction accuracy of yield losses and can, in general, improve rating performance. However, these improvements are specific to farms with limited yield histories, as there are no improvements for farms with the commonly used yield history of ten years. This suggests substantial rating improvements for new farms or those with limited histories for a particular crop, but more general improvements for the program are not likely to occur given a large number of current participants with a full ten‐year yield history.
The relevance and the impact of experience in insurance markets are underinvestigated. From Italian farm‐level data we estimate a dynamic discrete‐choice model of participation to investigate the role of experience. The methodology, coupled with exploratory analysis, allows one to compare how different sources of experience influence the crop insurance decision making process. We found that direct experience is a catalyst for insurance participation for medium and large farms. The experience indirectly acquired is also relevant, especially for small farms. Policy implications include the importance of information campaigns and of bolstering uptake to exploit the advantages of the inertia and spillover effects that emerge from experience.
The 2014 Farm Bill continued the trend towards more risk managementbased support for U.S. farmers. However, it also represents a major departure from previous legislation by introducing multiple program options among which producers had the ability to choose. While allowing producers to have choices creates flexibility, the design of the program required producers to consider potential outcomes for crop prices and production levels in future periods when making their decisions. Experience over the first two years of program implementation suggests that while programs are working as designed, not all producers are fully satisfied with their enrollment decisions. This will lead to proposals for further modification to programs, and to questions about whether program choice should be a component of the next Farm Bill. © The Author 2017. Published by Oxford University Press on behalf of the Agricultural and Applied Economics Association.
Food insecurity is now recognized as a major health crisis in the United States. This is due to the size of the problem-more than 42 million persons were food insecure in 2015-as well as the multiple negative health outcomes and higher health care costs attributable to food insecurity. An extensive body of literature from multiple fields has examined the causes and consequences of food insecurity and the efficacy of food assistance programs-especially the Supplemental Nutrition Assistance Program. We review this literature and provide suggestions for future research directions. We suggest examining the distribution of food insecurity within households, the impact of the food distribution system on food insecurity, the coping mechanisms of low-income food secure families, food insecurity among American Indians, the effects of charitable food assistance, the causal relationship between food insecurity and health outcomes, the declining age gradient in food insecurity among Seniors, the effects of labor force participation and the Great Recession on food insecurity, and the long-term consequences of food insecurity. In addition, the impact of two recent policy recommendations on food insecurity - the minimum wage and the Affordable Care - Act should be considered. © The Author(s) 2018. Published by Oxford University Press on behalf of the Agricultural and Applied Economics Association. All rights reserved.
The shift in the population from majority food-producer to majority food-consumer has played a role in public calls to reform federal policy to focus more on the consumer implications of the food supply chain. This article critically evaluates the food and farm policy proposals recently offered by prominent members of the so-called food movement. I demonstrate that the authors offer no consistent, underlying philosophical basis for when the federal government should (and should not) intervene and offer no framework for making tradeoffs when proposed "guarantees" come into conflict. Moreover, the authors misjudge the trajectory and impacts of changes in food and agriculture and thus overstate the urgency and scope for intervention. The authors' numerous specific policy proposals tend to represent a hodge-podge of ideas that have already been tried, are already being undertaken by the USDA, or fail to hold up under close scrutiny, although there is some common ground on a few proposals. © The Author 2017. Published by Oxford University Press on behalf of the Agricultural and Applied Economics Association. All rights reserved.
Agricultural insurance in developed countries originates in named peril products that were originally offered by private companies
approximately two hundred years ago, first in Europe and then in the United States. Today, many agricultural insurance products
are offered, most of them heavily subsidized by governments. In the context of developed economies, this article examines
the evolution of agricultural insurance products, the economics of the demand and supply sides of agricultural insurance markets,
and the economic welfare, political economy, and trade relation implications of private and public agricultural insurance
in developed countries.
The disaster program paid producers of program crops who had been prevented from planting a crop or who experienced lower yields because of natural disasters. Between 1974 and 1980, the Government paid an average of $436 million per year in disaster payments. Congress responded to low participation by making insurance compulsory and increasing premium subsidies. Under the Crop Insurance Reform Act of 1994, producers of insurable crops were eligible to receive a basic level of coverage, catastrophic risk protection (CAT), which initially covered 50% of a producer's approved yield at 60% of the expected market price. Congress believed it was important to have a more active sales force to sell insurance to producers. Thus, insurance companies would be reimbursed for administrative and operating expenses, and also share in the underwriting gains and losses. The price guarantee provided through crop insurance was over 50% higher, and in some cases more than twice that provided under the commodity programs.
Agriculture is subject to a wide variety of risks, including many hazards arising from widespread natural disasters. Most observers agree that the Risk Management Agency has done an increasingly effective job in determining actuarially-sound premium rates for the various crop insurance programs currently available. Proponents of the current program typically argue that, in the absence of subsidies, various market failures would lead to an absence of the risk management mechanisms that are important in production agriculture. The statistics demonstrate that the companies that make up the private part of the partnership have enjoyed substantial returns from the program. In addition to A&O subsidies, they have realized significant underwriting gains in all but one year between 2000 and 2009. Though the precise number and cost of such proposals is elusive due to the confidential nature of the process, this legislative action has provided an incentive for developers to conceive programs for even the most minor crops.
We present a new framework to identify supply elasticities of storable commodities where past shocks are used as exogenous price shifters. In the agricultural context, past yield shocks change inventory levels and futures prices of agricultural commodities. We use our estimated elasticities to evaluate the impact of the 2009 Renewable Fuel Standard on commodity prices, quantities, and food consumers’ surplus for the four basic staples: corn, rice, soybeans, and wheat. Prices increase 20 percent if one-third of commodities used to produce ethanol are recycled as feedstock, with a positively skewed 95 percent confidence interval that ranges from 14 to 35 percent.
Many commentators claim that farm subsidies have contributed significantly to the “obesity epidemic” by making fattening foods
relatively cheap and abundant and, symmetrically, that taxing “unhealthy” commodities or subsidizing “healthy” commodities
would contribute to reducing obesity rates. In this article we use an equilibrium displacement model to estimate and compare
the economic welfare effects from a range of hypothetical farm commodity and retail food policies as alternative mechanisms
for encouraging consumption of healthy food or discouraging consumption of unhealthy food, or both. We find that, compared
with retail taxes on fat, sugar, or all food, or subsidies on fruits and vegetables at the farm or retail levels, a tax on
calories would be the most efficient obesity policy. A tax on calories would have the lowest deadweight loss per pound of
fat reduction in average adult weight, and would yield a net social gain once the impact on public health care expenditures
is considered.
This article documents the design and rate-making procedures used in the development of the Group Risk Plan (GRP)—the new federal crop insurance product that insures based on area yield. The authors of this article worked closely with personnel in the Federal Crop Insurance Corporation and others in developing methodological and practical constraints needed in implementing a workable area yield contract. GRP indemnity payments are made based on percentage shortfalls in actual county yields relative to a forecasted yield. Historical county yield data are used to develop forecasted yields and premium rates. Copyright 1997, Oxford University Press.
Adverse selection is often blamed for crop insurance indemnities exceeding premiums plus subsidies. However, nationwide empirical
evidence has been lacking or based on inadequate county-level data. This article uses nationwide farm-level data on corn and
soybeans to decompose incentives for participation in U.S. multiple peril crop insurance into a risk-aversion incentive (the
conventional justification for insurance), an actuarial or subsidy incentive (reflecting government subsidization), and an
asymmetric information incentive (which reflects farmers' information advantage). Results show that the risk-aversion incentive
is small. Farmers participate in crop insurance primarily to receive the subsidy or because of adverse selection possibilities.
We present a new framework to identify demand and supply elasticities of agricultural commodities using yield shocks - deviations from a time trend of output per area, which are predominantly caused by weather fluctuations. Demand is identified using current-period shocks that give rise to exogenous shifts in supply. Supply is identified using past shocks, which affect expected future prices through inventory accretion or depletion. We use our estimated elasticities to evaluate the impact of ethanol subsidies and mandates on world food commodity prices, quantities, and food consumers' surplus. The current US ethanol mandate requires that about 5 percent of world caloric production from corn, wheat, rice, and soybeans be used for ethanol generation. As a result, world food prices are predicted to increase by about 30 percent and global consumer surplus from food consumption is predicted to decrease by 155 billion dollars annually. If a third of the biofuel calories are recycled as feed stock for livestock, the predicted price increase scales back to 20 percent. While commodity demand is extremely inelastic, price response is muted by a significant supply response that is obscured if futures prices are not instrumented. The resulting expansion of agricultural growing area potentially offsets the CO2 emission benefits from biofuels.
The literature on measuring the size and distribution of returns to research has paid increasing attention of late to questions that require a multimarket framework. These questions include the distribution of benefits among stages of a multistage process or among factors of production (i.e. the vertical incidence) and the distribution across different markets either for the same product in different places or for different products (the horizontal incidence). The latter may be regarded as including quality change which has attracted recent attention. In much of the literature, a linear elasticity modeling approach has been used to obtain measures of the consequences of research-induced supply shifts for prices and quantities which, in turn, are used to evaluate the size and distribution of welfare effects. This review summarizes the state of the art of that work. It is a selective treatment, beginning with a simple basic model of research benefits and proceeding to consider increasingly complicated problems of vertically and horizontally related markets. The recurring theme is the theoretical and empirical questions surrounding (a) how to represent technical changes, and model their effects on equilibrium displacements, in a theoretically consistent manner, and (b) how to translate those equilibrium displacement effects into welfare measures.
The scope and value of the equilibrium displacement models (EDM) methodology in consumer demand and welfare analysis is extensive. This article reviews the basic elements of the model. It discusses different applications of the models in the literature that show the utility of the approach. The major forms of the EDM and implications for consumer demand and welfare are highlighted. An important question when using the EDM to generate results for changes in prices, quantities, and surplus values is how sensitive are the results to alternative plausible values of the partial elasticities of the demand/supply equations. It then turns at last to issues related to statistical precision and approximation errors. It concludes with the discussion of modifications and extensions that are likely to be made.
In this paper, we explore the usefulness of nonparametric methods in the investigation of production behavior and the estimation of price elasticities of output supply and input demand functions. The approach can handle the situation where some data points are not consistent with production theory. The method is illustrated by estimating supply-demand elasticities of outputs and inputs in U.S. agriculture.
Knowledge of factors affecting farmer purchases of crop insurance is essential for evaluating the soundness and profitability of crop insurance programs. Despite this importance, the demand for crop insurance has received limited empirical attention. The present paper reports on an empirical assessment of the demand for crop insurance by Iowa corn producers. Adverse selection in the insured pool suggests that producers with differing levels of loss-risk have different demand elasticities. Loss-fisk is included in the empirical analysis and is found to influence the elasticity of demand. Results show average demand elasticities of about -0.32 for relative insured acres and -0.73 for liability per planted acre. Implications for the actuarial soundness of the industry are provided.
This research explores the viability of an alternative design for crop insurance based upon farmer-owned savings accounts
that are regulated, monitored, and marginally assisted by the government. Such accounts could be an effective risk management
tool for many farmers and could operate without major government subsidization. Relative to the current program, the proposed
design should exhibit minimal moral hazard and adverse selection problems, and since farm-level risk does not have to be priced,
the proposed design eliminates the premium rating difficulties that weaken actuarial soundness and trigger the need for substantial
external subsidies. In addition, administrative costs should be considerably lower.
The farm policy debate in the US continues to evolve rapidly as priorities and perceptions change. For some time now risk protection has been the primary rationale used to justify federal farm programs; hence the commonly expressed need for a farm safety net. As the 2008 farm bill neared its expiration and debate began on a new farm bill, direct payments became perceived as the least politically defensible of the existing farm programs, since direct payments provide no risk protection. Thus, it became widely agreed that direct payments would be reduced or eliminated to reach budget reduction targets. Some may argue that policy-makers adopted and maintained crop insurance premium subsidies simply as a mechanism for transferring federal dollars to crop farmers. It is certainly true that if crop insurance policies are priced correctly, premium subsidies effectively transfer income from taxpayers to crop insurance purchasers.
Since 1980, the Multiple Peril Crop Insurance (MPCI) program has occupied a prominant role in U.S. farm policy. MPCI coverage
offerings have been greatly expanded to try to effectively substitute for other forms of federal crop disaster assistance.
In this paper, we survey a substantial body of agricultural economics literature that has examined issues relating to the
MPCI program. We give an assessment of research findings along with suggested directions for future research.
Federal subsidized crop insurance has been a major fixture of US agricultural policies for the past several decades. In recent years, the program has expanded rapidly and now constitutes the largest and most expensive agricultural subsidy initiative in the United States. Similar programs have been introduced around the world. All these programs have one common denominator: Absent generous subsidies, participation is minimal. Such subsidies introduce the potential for a wide range of distortions. Intensive margin distortions may result from moral hazard as insured growers alter their production practices. Distortions at the extensive margin may arise as acreage decisions reflect the presence of subsidized risk management, resulting in lands with alternative uses being planted to crops. Arange of environmental effects may arise as a result of these distortions. Not all those effects are negative, because subsidized insurance may result in less intensive use of chemical and fertilizer inputs. We review the history and operation of the current program and discuss the options currently being deliberated for future crop insurance programs.
Barnett and Skees' interesting comment raises two objections to my analysis of the demand for multiple peril crop insurance. The first is that my contention that across-the-board premium increases could "possibly raise overall industry loss-ratios" (p. 434) is incorrect. The second is that the demand specification that uses liability per planted acre as a measure of insurance purchases is incorrect because it imposes the assumption of equal expected yields across counties. I appreciate their comments and the opportunity to reply. Barnett and Skees' comments contribute to the ongoing policy debate regarding the future of crop insurance and disaster relief programs and should stimulate further discussion. However, the points raised in their first objection may be misleading to policy makers' efforts to improve the actuarial performance of the crop insurance program. The arguments put forth in their second criticism are incorrect.
Supply equations for five output groups and demand equations for four input groups in ten regions of the United States are
estimated and evaluated. The econometric estimation is conducted for complete regional product supply and input demand systems
subject to competitive theory. The results document the extreme diversity of production relationships within the United States.
They clearly indicate the unequal effects of changes in economic conditions and government policies on major production regions.
Efficiency in redistribution is measured in terms of deadweight loss generated per dollar of economic surplus transferred
between consumers and producers of a commodity by means of market intervention. The implications of supply and demand elasticities
for efficiency in redistribution are examined with special attention to the comparison of production control and deficiency
payment programs. The results may be used to aid in the evaluation of commodity programs and as a basis for consideration
of the hypothesis that observed policies are efficient, given the political power of interest groups.
A definition of moral hazard in multiple peril crop insurance is proposed that focuses on expected indemnities rather than
input use. Five years of production and insurance data for a panel of Kansas wheat farms is used to empirically test for this
type of moral hazard. Results suggest that moral hazard affects multiple peril crop insurance indemnities in poor production
years but that no significant moral hazard occurs in years when growing conditions are favorable.
Many commentators have speculated that agricultural policies have contributed to increased obesity rates in the United States, yet such claims are often made without any analysis of the complex links between real-world farm commodity support programs, prices and consumption of foods, and caloric intake. This article carefully studies the effects of US agricultural policies on prices and quantities of 10 agricultural commodities and nine food categories in the United States over time. Using a detailed multimarket model, we simulate the counterfactual removal of measures of support applied to US agricultural commodities in 1992, 1997, and 2002 and quantify the effects on US food consumption and caloric intake. To parameterize the simulations, we calculate three alternative measures of consumer support (the implicit consumer subsidy from policies that support producers) for the 10 agricultural commodities using information about government expenditures on agricultural commodities from various sources. Our results indicate that-holding all other policies constant-removing US subsidies on grains and oilseeds in the three periods would have caused caloric consumption to decrease minimally whereas removal of all US agricultural policies (including barriers against imports of sugar and dairy products) would have caused total caloric intake to increase. Our results also indicate that the influence of agricultural policies on caloric intake has diminished over time. Copyright © 2012 John Wiley & Sons, Ltd.
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