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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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