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Subsidized Crop Insurance And The Extensive Margin

Author

Listed:
  • LaFrance, Jeffrey T.
  • Shimshack, Jason
  • Wu, Steven Y.

Abstract

A partial equilibrium model of stochastic crop production is used to analyze the influence of subsidized crop insurance on the extensive margin. The addition of a crop insurance program that is characterized by a perfectly separating equilibrium and an actuarially fair premium for each quality does not change input use or land allocation. However, Risk neutral farmers facing actuarially fair premiums are indifferent between the purchase and not purchase decision. risk averse farmers all will purchase actuarially fair crop insurance. Premium subsidies create incentives for the extensive margin to expand at the lower end of the quality spectrum leading to adverse selection. Land in production without crop insurance remains in production with subsidized crop insurance. An actuarially fair pooling equilibrium creates incentives for the extensive margin to expand at the lower end of the quality spectrum, again leading to adverse selection. In the short-run, owners of high quality land do not insure their crops, while owners of the lowest quality land purchase insurance, exacerbating adverse selection. In the long-run, the pooling equilibrium premium rate increases until a limiting solution is obtained in which risk neutral owners of only one land quality type are indifferent between insuring and not insuring a quality of land. For risk averse farmers there will be a nondegenerate long-run pooling equilibrium. Premium subsidies mitigate the disincentive for higher quality landowners to purchase insurance, but exacerbate the incentive to expand the extensive margin.

Suggested Citation

  • LaFrance, Jeffrey T. & Shimshack, Jason & Wu, Steven Y., 2000. "Subsidized Crop Insurance And The Extensive Margin," CUDARE Working Papers 25018, University of California, Berkeley, Department of Agricultural and Resource Economics.
  • Handle: RePEc:ags:ucbecw:25018
    DOI: 10.22004/ag.econ.25018
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    Citations

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    Cited by:

    1. Jesse Tack & Rulon Pope & Jeffrey LaFrance & Timothy Graciano & Scott Colby, 2012. "Intertemporal Risk Management in Agriculture," Monash Economics Working Papers 16-12, Monash University, Department of Economics.
    2. Jisang Yu & Daniel A. Sumner, 2018. "Effects of subsidized crop insurance on crop choices," Agricultural Economics, International Association of Agricultural Economists, vol. 49(4), pages 533-545, July.
    3. Dolginow, Joseph & Massey, Raymond E. & Myers, Brent & Kitchen, Newell, 2013. "Adjusting Crop Insurance APH Calculation to Accommodate Biomass Production," 2013 AAEA: Crop Insurance and the Farm Bill Symposium 156945, Agricultural and Applied Economics Association.
    4. Egelkraut, Thorsten M. & Garcia, Philip & Pennings, Joost M.E. & Sherrick, Bruce J., 2006. "Producers' Yield and Yield Risk: Perceptions versus Reality and Crop Insurance Use," 2006 Annual meeting, July 23-26, Long Beach, CA 21369, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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