A new AIC study by Daniel Sumner and Jisang Yu, published in July 2018 in Agricultural Economics, focuses on how subsidized crop insurance affects crop choices. Crop insurance may change farm investments by reducing risks and providing subsidies. First, actuarially fair insurance reduces risks in crop production and marketing, holding the expected return constant. Second, insurance subsidies encourage farms to purchase crop insurance, which increases the expected return to insured risky crops.
The paper explores substitutions between market insurance and self-insurance and between a risky crop and a safe crop, and discusses each effect as a combination of subsidy and risk effects. Numerical illustrations show that an insurance subsidy has a larger impact on risky crop investments compared to that of an input subsidy when farms are more risk-averse and have high costs of self-insurance. The framework provides a novel way to evaluate subsidized crop insurance programs.