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Inertia in the U.S. federal crop insurance market

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  • Du, Xiaodong

Abstract

We document significant inertia in farmers' crop insurance choices using a large panel of farm insurance records. Farmers often retain their previous year's plans, even after substantial shocks. We quantify inertia as the cost of switching plans in a discrete choice framework, incorporating an inertia indicator along with plan-specific attributes such as premiums, subsidies, and expected indemnities. These attributes are constructed based on individual farm characteristics. Our analysis estimates the average switching cost at approximately $10.9 per acre, comparable to the average per-acre premium for the yield insurance plan (APH) at 65% coverage and the revenue insurance plan (CRC) at 55% coverage. Explicit and implicit switching costs, information friction, and inattention contribute to this inertia.

Suggested Citation

  • Du, Xiaodong, 2025. "Inertia in the U.S. federal crop insurance market," International Journal of Industrial Organization, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:indorg:v:100:y:2025:i:c:s0167718725000165
    DOI: 10.1016/j.ijindorg.2025.103149
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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