Does risk matter for farm businesses? The effect of crop insurance on production and diversification
AbstractWe use a large increase in Federal crop insurance subsidies as a natural experiment to identify the impact of risk on acreage and diversification decisions. Subsidy increases induced greater crop insurance coverage, which reduced farmers' financial risks. Did this change in the risk environment alter production decisions? We merged crop insurance participation data with farm-level Agricultural Census data from 1992 and 1997 to examine how harvested acreage and diversification changed in response to the policy-induced change in insurance coverage. The difference in differences empirical approach controls for unobservable heterogeneity and our results are robust across multiple definitions of our key variables and various fixed effects. We find that changes in the risk environment caused larger farms to expand while smaller farms shrank. Regardless of size, producers showed some evidence of using diversification as a method to mitigate risk. However, risk does not seem to have large overall effects.
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Bibliographic InfoPaper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2005 Annual meeting, July 24-27, Providence, RI with number 19397.
Date of creation: 2005
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PIER Working Paper Archive
09-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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