Land Use Consequences of Crop Insurance Subsidies

There have long been concerns that federal crop insurance subsidies may significantly impact land use decisions. It is well known that classical insurance market information asymmetry problems can lead to a social excess of risky land entering crop production. Our conceptual model shows that the problem will arise absent any information failures. This is because the subsidy is i) proportional to acres planted, and ii) greatest for the most production risky land. Using farm-level data, we follow this observation through to establish the implications of subsidies for the extent of crop production, with particular emphasis on U.S. regions where the cropland growth is likely to have marked adverse environmental impacts. Simulation results show that when subsidy rate decreases by 5 percentage points, then about 0.60 percent of insured cropped land will be converted to non-cropped land. When crop price decreases by 5 percent, then about 1.01 percent of insured cropped land will be converted to non-cropped land.