The Effects of the Premium Subsidies in the U.S. Federal Crop Insurance Program on Crop Acreage

The U.S. federal crop insurance program experienced periodic policy changes over the past three decades that increased premium subsidies. These premium subsidies encourage changes in crop acreage for two reasons. First, holding insurance coverage constant, premium subsidies directly increase the expected return, which may encourage more acreage of the insured crop (profit effect). Second, premium subsidies encourage farms to increase crop insurance coverage. With more insurance coverage, farm revenue, which includes crop revenues and expected crop insurance indemnity payments, becomes less variable and therefore, acreage of the insured crop may increase (coverage effect). By exploiting exogenous policy changes, this study estimates the sum of these two distinct effects of premium subsidies on crop acreage. Using about 180,000 county-crop-year observations for seven major crops over 26 years, we estimate that a 10% increase in the premium subsidy causes a 0.39% increase in crop acreage. Taking account of the small share of crop insurance premium subsidies in expected crop revenue, this estimate is analogous to an analogue to the own-price elasticity is about 1.10. This estimate exceeds supply elasticity estimates in the literature because crop insurance premium subsidies has a coverage effect in addition to a profit effect.

Issue Date:
Aug 01 2016
Publication Type:
Conference Paper/ Presentation
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 Record created 2017-04-01, last modified 2018-01-23

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