Policy Implications of Joint Estimation of Crop Insurance Demand
Department of Agricultural & Applied Economics
University of Wisconsin - Madison
Wednesday, November 7, 2018
Taylor-Hibbard Seminar Room (Rm103)
12:00 pm-1:30 pm
The federal crop insurance program is a major risk management program for U.S. farmers to manage production risks, but federal spending for the premium subsidy has been much debated. This study empirically estimates county-level demand for the two primary crop insurance policies – yield and revenue insurance – and allows substitution between the policies. With considering the endogeneity in observed premium rate, results show average own price elasticities of around -0.45 for insured acres and around -0.9 to -1 for liability per planted acre, with significant cross-price effects indicating the importance of accounting for substitution between yield and revenue insurance. Based on our estimation results, we simulate policy scenarios to project the impact that premium subsidy reductions have on crop insurance participation and total insured liability. Policy simulations suggest a 10% reduction in premium subsidies would result in the share of planted acres insured to decrease 0.07% for yield insurance and 3.17% for revenue insurance, and the average liability per planted acre to decrease $0.75 for yield and $36.68 for revenue insurance. State-specific results are also presented. These results can help policy makers better understand the tradeoffs for crop insurance and overall government support for agriculture.