Abstract
Producers' acreage decisions in response to the availability of insurance and government subsidy has been a topic of considerable attention. This study revisits the issue of agriculture producers' production behavior under crop insurance and premium subsidy conditions. The discussion begins by differentiating between the assumptions of the classic insurance model and that model's application to crop insurance. A discussion of a closed dual economy model follows. Price difference in cases of disaster and no disaster essentially determines producers' response to the availability of a premium subsidy. A producer can obtain higher production revenue due to the significant increase in price induced by yield loss if the economy is closed and a subsistence constraint is taken into account. In this case, a premium subsidy could induce producers to lower their output level. The result is further generalized by two model extensions in which assumptions are relaxed to allow openness in the economy or intertemporal storage of grains with grain reserve policy. The findings of this article suggest that governments should carefully examine the actual risk-bearing pattern of crop producers before any subsidy policy is implemented.
Highlights
National governments frequently provide a direct subsidy to the crop insurance premium paid by producers so as to achieve varied economic and political goals
The classic insurance model could be regarded as a special case among crop insurance models by assuming equal prices across states
The state-contingent utility structure reveals the actual risk-bearing pattern in this economy in which urban workers bear more risks than rural producers. This pattern is quite different from the model’s assumption that disasters happen only to the rural sector and the urban sector is riskfree. This effect is a direct consequence of the subsistence constraint and a closed-static economy, which shifts most of the risks from producers to workers
Summary
National governments frequently provide a direct subsidy to the crop insurance premium paid by producers so as to achieve varied economic and political goals. Adopters of this policy instrument were the United States, Canada, and Japan (Barnett 2007). Previous empirical studies reveal some modest effect of a decreased premium on acreage increase in the United States (Goodwin, Vandeveer, and Deal 2004; Wu and Adams 2001) Whether this is true in a more generalized context is the main topic of this article. The entire study is summarized and the gap between this theoretical work and possible policy implications are discussed
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