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Does risk matter for farm businesses? The effect of crop insurance on production and diversification

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

Abstract

We use a large increase in Federal crop insurance subsidies as a natural experiment to identify the impact of risk on acreage and diversification decisions. Subsidy increases induced greater crop insurance coverage, which reduced farmers' financial risks. Did this change in the risk environment alter production decisions? We merged crop insurance participation data with farm-level Agricultural Census data from 1992 and 1997 to examine how harvested acreage and diversification changed in response to the policy-induced change in insurance coverage. The difference in differences empirical approach controls for unobservable heterogeneity and our results are robust across multiple definitions of our key variables and various fixed effects. We find that changes in the risk environment caused larger farms to expand while smaller farms shrank. Regardless of size, producers showed some evidence of using diversification as a method to mitigate risk. However, risk does not seem to have large overall effects.

Suggested Citation

  • O'Donoghue, Erik J. & Key, Nigel D. & Roberts, Michael J., 2005. "Does risk matter for farm businesses? The effect of crop insurance on production and diversification," 2005 Annual meeting, July 24-27, Providence, RI 19397, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea05:19397
    DOI: 10.22004/ag.econ.19397
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    Cited by:

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    2. Hongbin Cai & Yuyu Chen & Hanming Fang & Li-An Zhou, 2009. "Microinsurance, Trust and Economic Development: Evidence from a Randomized Natural Field Experiment," NBER Working Papers 15396, National Bureau of Economic Research, Inc.
    3. Cao, Ying & Zhang, Yuehua, 2011. "Hog Insurance Adoption and Suppliers' Discrimination: A Bivariate Probit Model with Partial Observability," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103158, Agricultural and Applied Economics Association.

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    Risk and Uncertainty;

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