The Unintended Consequences of Farm Insurance: A Causal Investigation of Income, Productivity and Input Dynamics

Agricultural insurance is a useful tool for managing risk, and many governments offer support to encourage farmers to participate. However, empirical analysis exploring the dynamic effects of participation in these schemes is limited. This study investigates the causal relationship between agricultural insurance participation and farm productivity, income and input usage over both the short and long terms. Using the Italian Farm Accountancy Data Network between 2018 and 2022, the study applies a difference‐in‐differences approach that allows assessment of the dynamic impact of insurance. The findings reveal that insurance participation has a persistent negative effect on farm income and productivity, particularly in the early years of participation. This decline suggests moral hazard behaviour, where insured farmers reduce entrepreneurial effort. However, no significant long‐term changes were observed in fertiliser or crop protection usage, while usage increased immediately after insurance adoption but decreased in subsequent years. The results of this study suggest that while insurance is designed to mitigate income volatility during adverse events, it does not necessarily improve profitability or productivity because of reduced production incentives and higher insurance premium costs. The study highlights the policy challenge of designing agricultural insurance schemes that can improve risk management without weakening productivity growth.