The Acreage Effects of Premium Subsidies in U.S. Crop Insurance

• Agricultural Economics Workshop

Date and Location

Thursday, November 5, 2015, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

The U.S. federal crop insurance program has experienced several policy changes that increased crop insurance premium subsidies over the past three decades. By exploring the exogenous policy changes, this study estimates the acreage effect of premium subsidies in the U.S. federal crop insurance program. Crop insurance premium subsidies encourage farmers to insure more crop acreage or to increase coverage level. With insurance, farm revenue, which includes crop revenues and expected crop insurance indemnity payments, becomes less risky and therefore, crop acreage of the insured crop may increase. Premium subsidies also can directly make the insured crop more profitable by increasing the expected return, which also may increase the acreage of that crop. This study estimates the acreage effect of the premium subsidy in the U.S. federal crop insurance program, which is a mixture of the two different effects of the premium subsidy. The preliminary results provide two estimated parameters. The acreage response to the 10% increase in the premium subsidy is about a 0.7% increase. The crop insurance quantity demanded rises by about 9.4% for a 10% increase in the premium subsidy. The results provide some evidence that there is an additional acreage effect of the premium subsidy in addition to the encouragement of the crop insurance purchases and the consequence reduction in risk.