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The Impact of Crop Insurance on Farm Financial Outcomes

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  • DeLay, Nathan D.
  • Brewer, Brady E.
  • Featherstone, Allen M.
  • Boussios, David

Abstract

We use data from the Kansas Farm Management Association to estimate the impact of crop insurance liability and insurance indemnities on farm debt. Subsidized crop insurance may increase farms' financial risk through a mechanism known as “risk balancing.” Previous findings in support of risk balancing may suffer from bias due to unobservable farm characteristics and simultaneity in insurance and debt decisions. Employing a simultaneous equations model with farm fixed effects, we find no statistical relationship between crop insurance liability and debt, calling into question the risk balancing hypothesis in federal crop insurance. We show that large insurance indemnity payments reduce farms' reliance on short‐term debt, but leave the total debt level unchanged.
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Suggested Citation

  • DeLay, Nathan D. & Brewer, Brady E. & Featherstone, Allen M. & Boussios, David, 2019. "The Impact of Crop Insurance on Farm Financial Outcomes," 2019 Annual Meeting, July 21-23, Atlanta, Georgia 290744, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea19:290744
    DOI: 10.22004/ag.econ.290744
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    References listed on IDEAS

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    1. Jennifer E Ifft & Todd Kuethe & Mitch Morehart, 2015. "Does federal crop insurance lead to higher farm debt use? Evidence from the Agricultural Resource Management Survey (ARMS)," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 75(3), pages 349-367, September.
    2. Jennifer E Ifft & Todd Kuethe & Mitch Morehart, 2015. "Does federal crop insurance lead to higher farm debt use? Evidence from the Agricultural Resource Management Survey (ARMS)," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 75(3), pages 349-367, September.
    3. Babcock, Bruce, 2015. "Using Prospect Theory to Explain Anomalous Crop Insurance Coverage Choice," 2015 Allied Social Sciences Association (ASSA) Annual Meeting, January 3-5, 2015, Boston, Massachusetts 189682, Agricultural and Applied Economics Association.
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