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Does crop insurance inhibit climate change technology adoption?

Author

Listed:
  • Sarah C. Sellars

    (University of Illinois)

  • Nathanael M. Thompson

    (Purdue University)

  • Michael E. Wetzstein

    (Purdue University)

  • Laura Bowling

    (Purdue University)

  • Keith Cherkauer

    (Purdue University)

  • Charlotte Lee

    (Purdue University)

  • Jane Frankenberger

    (Purdue University)

  • Ben Reinhart

    (Purdue University)

Abstract

Changing temperatures and precipitation patterns from climate change are a major risk to crop yields. Producers have technology options for mitigating this risk with one such technology termed drainage water recycling (DWR). DWR involves diverting subsurface drainage water to ponds where it is stored for later irrigation. Crop insurance may interfere with DWR adoption by providing producers with another avenue to manage climate change risk. It is hypothesized that government-subsidized crop insurance reduces climate change technology adoption. Based on real options, this analysis considers two policy regimes: when crop insurance is in effect and not. In a Poisson jump process, it further considers the insurance effect of producers’ returns jumping when facing a crop disaster. Results indicate crop insurance has a minimal effect on DWR adoption, and in most scenarios, the DWR adoption thresholds are too large for a producer to invest for climate change adaptation without additional financial incentives. The baseline DWR adoption scenario, with no crop insurance impact, requires revenue of $1,114/acre, or 1.57 times current conventional revenue.

Suggested Citation

  • Sarah C. Sellars & Nathanael M. Thompson & Michael E. Wetzstein & Laura Bowling & Keith Cherkauer & Charlotte Lee & Jane Frankenberger & Ben Reinhart, 2022. "Does crop insurance inhibit climate change technology adoption?," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 27(3), pages 1-20, March.
    • Handle: RePEc:spr:masfgc:v:27:y:2022:i:3:d:10.1007_s11027-022-09998-1
    DOI: 10.1007/s11027-022-09998-1
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    More about this item

    Keywords

    Asset investment; Climate change; Crop insurance; Real options analysis; Technology adoption;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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