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Subsidized Crop Insurance Design and its Effect on Incentives for Risk Mitigation

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  • Van Tassell, Gerald
  • Ker, Alan

Abstract

The United States spends billions annually on crop insurance premium subsidies, yet the prevailing distance-based guarantee design unintentionally rewards risk-taking by linking subsidies to yield variability. We consider a simple redesign: define guarantees in terms of probability so that coverage reflects a consistent likelihood of indemnity. Using U.S. data, this probability-based approach would reallocate about $3.3 billion in annual subsidies from high-risk to low-risk production, reducing regional disparities by two-thirds without changing total subsidies. Because most publicly subsidized crop insurance programs around the world share this structure, adopting probability-based guarantees could help realign agricultural production toward more resilient and sustainable regions and practices.

Suggested Citation

  • Van Tassell, Gerald & Ker, Alan, 2026. "Subsidized Crop Insurance Design and its Effect on Incentives for Risk Mitigation," 2026 Annual Meeting, July 26 - 28, 2026, Kansas City, Missouri 404359, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea26:404359
    DOI: 10.22004/ag.econ.404359
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    References listed on IDEAS

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    1. Jushan Bai, 1997. "Estimation Of A Change Point In Multiple Regression Models," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 551-563, November.
    2. Alan P Ker & Tor N Tolhurst, 2019. "On the Treatment of Heteroscedasticity in Crop Yield Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 101(4), pages 1247-1261.
    3. Jisang Yu & Aaron Smith & Daniel A Sumner, 2018. "Effects of Crop Insurance Premium Subsidies on Crop Acreage," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(1), pages 91-114.
    4. Ardian Harri & Keith H. Coble & Alan P. Ker & Barry J. Goodwin, 2011. "Relaxing Heteroscedasticity Assumptions in Area-Yield Crop Insurance Rating," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(3), pages 703-713.
    5. Keith H. Coble & Barry J. Barnett, 2013. "Why Do We Subsidize Crop Insurance?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 95(2), pages 498-504.
    6. Alan P. Ker & Barry K. Goodwin, 2000. "Nonparametric Estimation of Crop Insurance Rates Revisited," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(2), pages 463-478.
    7. Deepak K. Ray & James S. Gerber & Graham K. MacDonald & Paul C. West, 2015. "Climate variation explains a third of global crop yield variability," Nature Communications, Nature, vol. 6(1), pages 1-9, May.
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