Files
Abstract
This paper investigates the effect of government-provided crop insurance on
farm failure rates. By exploiting random variation in weather and the Federal
Crop Insurance Reform Act of 1994, which mandated crop insurance coverage
for the first time, I employ two natural experiments that identify the causal
effect of disaster relief on farm failure rates. I examine the survival smoothing
contribution of crop insurance by looking at the relative effect of disaster relief
across two regimes, pre- and post-1994. Prior to 1994 ad hoc, ex post disaster
payments were the primary form of disaster relief. Shortly after the 1994 Act
virtually all disaster relief came through crop insurance indemnities. I find that
disaster relief in the form of ad hoc disaster payments slightly reduces the
average farm failure rate, while average farm failure rates increase under the
crop insurance regime. The relative effect suggests that farm failure rates
increase by 1.7 percentage points (about 30-percent) under the crop insurance
regime. Excessively generous ad hoc disaster payments and moral hazard
provide possible explanations for these findings. These findings suggest that
government-provided crop insurance plays an important role in farmer risk
management.