Farmer response to crop insurance incentives under heterogeneous risk-management strategies Report as inadecuate

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Understanding how farmers respond to premium subsidies and other incentives to purchase crop insurance is fundamental to evaluating how changes in these incentives affect the use of federal crop insurance and thus the Federal savings that can be expected. We use contract-level data for corn enterprise units in 2008 and 2009 to examine how modifications to the out-of-pocket cost of crop insurance affect farmers’ insurance coverage level decisions and government expenditures. Unlike previous studies that have examined this question, we use a specialized discrete choice framework, an ordered generalized extreme value (OGEV) model. This approach explicitly accounts for the natural ordering of the choice set from low to high coverage. Our results suggest a significant difference in the response to changes in the unit price of federal crop insurance for farmers that are observed to choose a low coverage level versus those that are observed to choose a high coverage level. This has significant implications for the potential government cost savings and change in average farmer coverage level that can be expected from a change in the structure of premium subsidies.

Keywords: crop insurance ; premium subsidies ; discrete choice ; generalized extreme value ; ordered alternatives

Subject(s): Agricultural and Food Policy

Demand and Price Analysis

Issue Date: 2016

Publication Type: Conference Paper/ Presentation

PURL Identifier:

Total Pages: 34

JEL Codes: Q18

Record appears in: Agricultural and Applied Economics Association (AAEA) > 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts

Author: Heerman, Kari E.R. ; Cooper, Joseph ; Johansson, Robert ; Worth, Thomas


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