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Did the Federal Crop Insurance Reform Act Alter Farm Enterprise Diversification?

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  • Erik J. O'Donoghue
  • Michael J. Roberts
  • Nigel Key

Abstract

We estimate how much United States farms changed enterprise diversification in response to a marked increase in crop insurance coverage brought about by the 1994 Federal Crop Insurance Reform Act, which substantially increased insurance subsidies. The analysis exploits farm-level panel census data to compare farm-specific changes in enterprise diversification over time. By examining diversification decisions of the same farms over time, we control for time-invariant unobserved individual heterogeneity. We then use pooled cross-sectional data from the United States Department of Agriculture (USDA) Agricultural Resource Management Survey to estimate the relationship between farm diversification and average returns. We find that the insurance subsidies caused a modest increase in enterprise specialisation and production efficiency. Estimated efficiency gains are far less than the subsidies. Copyright Journal compilation (c) 2008 The Agricultural Economics Society. No claim to original US government works.

Suggested Citation

  • Erik J. O'Donoghue & Michael J. Roberts & Nigel Key, 2009. "Did the Federal Crop Insurance Reform Act Alter Farm Enterprise Diversification?," Journal of Agricultural Economics, Wiley Blackwell, vol. 60(1), pages 80-104.
  • Handle: RePEc:bla:jageco:v:60:y:2009:i:1:p:80-104
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    References listed on IDEAS

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    1. S. R. Johnson, 1967. "A Re-examination of the Farm Diversification Problem," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 49(3), pages 610-621.
    2. Rulon D. Pope & Richard Prescott, 1980. "Diversification in Relation to Farm Size and Other Socioeconomic Characteristics," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 62(3), pages 554-559.
    3. Ani L. Katchova, 2005. "The Farm Diversification Discount," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(4), pages 984-994.
    4. Lindon J. Robison & John R. Brake, 1979. "Application of Portfolio Theory to Farmer and Lender Behavior," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 61(1), pages 158-164.
    5. John G. Stovall, 1966. "Income Variation and Selection of Enterprises," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 48(5), pages 1575-1579.
    6. Earl O. Heady, 1952. "Diversification in Resource Allocation and Minimization of Income Variability," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 34(4), pages 482-496.
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    Cited by:

    1. repec:eee:eneeco:v:64:y:2017:i:c:p:321-334 is not listed on IDEAS
    2. Chakir, Raja & Hardelin, Julien, 2011. "Hail Insurance and Pesticide use in French agriculture: an empirical analysis of multiple risks management," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114312, European Association of Agricultural Economists.
    3. Ifft, Jennifer & Kuethe, Todd & Morehart, Mitch, 2015. "Does Federal Crop Insurance lead to higher farm debt use? Evidence from the Agricultural Resource Management Survey," Working Papers 250011, Cornell University, Department of Applied Economics and Management.
    4. Burns, Christopher & Prager, Daniel, "undated". "Do Direct Payments and Crop Insurance Influence Commercial Farm Survival and Decisions to Expand?," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235693, Agricultural and Applied Economics Association.
    5. Jeremy G. Weber & Nigel Key & Erik O’Donoghue, 2016. "Does Federal Crop Insurance Make Environmental Externalities from Agriculture Worse?," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(3), pages 707-742.
    6. Saenz, Mariana & Thompson, Eric, 2017. "Gender and Policy Roles in Farm Household Diversification in Zambia," World Development, Elsevier, vol. 89(C), pages 152-169.
    7. Olen, Beau & Wu, Junjie, 2013. "Supply of Insurance for Specialty Crops and its Effect on Yield and Acreage," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150787, Agricultural and Applied Economics Association.
    8. Dimitar Nikolov & Sergio Gomez-y-Paloma & Minka Chopeva & Marianne Lefebvre, 2014. "Main Factors of the Development and Attractiveness of the Insurance Market for the Agricultural Companies," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 99-121.
    9. Rachael D. Garrett & Meredith Niles & Juliana Gil & Philip Dy & Julio Reis & Judson Valentim, 2017. "Policies for Reintegrating Crop and Livestock Systems: A Comparative Analysis," Sustainability, MDPI, Open Access Journal, vol. 9(3), pages 1-22, March.
    10. Ethan Ligon, 2011. "Supply and Effects of Specialty Crop Insurance," NBER Chapters,in: The Intended and Unintended Effects of U.S. Agricultural and Biotechnology Policies, pages 113-142 National Bureau of Economic Research, Inc.
    11. Miao, Ruiqing & Khanna, Madhu, 2015. "Costs of Meeting the Cellulosic Biofuel Mandate with an Energy Crop with Establishment Cost and Yield Risk: Implications for Policy," 2015 Conference, August 9-14, 2015, Milan, Italy 212458, International Association of Agricultural Economists.

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