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Abstract

U.S. farm policy has undergone a series of premium subsidy increases since 1994 to make crop insurance more affordable to farmers. Previous research shows that subsidized crop insurance may cause farmers to shift or expand their production. This study models the acreage response of U.S. cotton at the county level to subsidized crop insurance using simultaneous insurance participation and acreage response equations. Results of panel data analyses from 1995 to 2005 suggest that higher insurance benefits, such as subsidy per unit of production, encourages crop insurance participation which then stimulates additional crop acreage. In addition, counties with relatively low yields are more responsive to insurance participation and acreage than high yielding counties. Empirical evidence implies that crop insurance policies for cotton are shifting the regional comparative advantage of production from relatively high yielding and quality counties to lower yielding and quality counties.

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