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The Politics and Economics of the U.S. Crop Insurance Program

The Politics and Economics of the U.S. Crop Insurance Program

Chapter:
(p.83) 3 The Politics and Economics of the U.S. Crop Insurance Program
Source:
The Intended and Unintended Effects of U.S. Agricultural and Biotechnology Policies
Author(s):
Bruce A. Babcock
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226988061.003.0004

The demand for crop insurance is motivated by both expected returns and risk reduction. This chapter presents estimates of demand for crop insurance that isolate the demand for risk reduction from the demand for expected returns by construction of a data set from which the farmer response to actuarially fair contract offers can be estimated. Results indicate that a large number of producers find that the risk reductions offered by revenue insurance generate significant value, suggesting that some public support for crop insurance may be useful if private provision of crop insurance is infeasible because of a lack of reinsurance markets. Results indicate that large premium subsidies are not needed to induce farmers to buy higher amounts of insurance because a significant proportion of farmers would buy actuarially fair insurance. However, significant adverse selection problems would arise if premium subsidies were withdrawn because it is difficult to offer insurance contracts that are individually actuarially fair.

Keywords:   agricultural subsidies, economic stabilization, crop insurance, Agricultural Risk Protection Act, risk reduction

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