ARPA Subsidies, Unit Choice, and Reform of the U.S. Crop Insurance Program

The Agricultural Risk Protection Act (ARPA) has largely met its objectives of inducing farmers to increase their use of the crop insurance program. Both insured acreage and coverage levels have increased dramatically in response to ARPA's large increase in premium subsidies. An unintended consequence of the larger subsidies is a dramatic increase in the incentive for farmers to insure their crops under optional units, that is, insurance at the field level rather than at the farm or crop level. The expected rate of return to farmers who choose to invest additional premium dollars to move to optional unit coverage ranges from a low of 61 percent at the 85 percent coverage level to 144 percent at the 65 percent coverage level. This explains why the majority of farmers choose optional unit coverage even though the alternative unit structures provide identical insurance guarantees at a substantially lower cost. We consider two policy options to eliminate the unintended consequences of ARPA subsidies.


Issue Date:
2005
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/18297
Total Pages:
23
Series Statement:
CARD Briefing Paper 05-BP 45




 Record created 2017-04-01, last modified 2017-08-24

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