Analysis of Policy Effects Caused by Providing Additional Insurance Premium Subsidy by Local Governments

Abstract

This study analyzes policy effects caused by providing additional insurance premium subsidy by local governments in addition to the central government. For this purpose we test whether insurance premium subsidy by local governments increases insurance participation rate and causes farmers to commit moral hazard through using two-way fixed effects model. The results show that insurance premium subsidy by local governments reduces the financial burden on farmers and encourages them to take up an insurance policy. However, excessive subsidy results in heavy fiscal burden and moral hazard committed by participants. Therefore, local governments need to provide differentiated subsidy rates considering production risk, loss rate, and participation rate for each individual agricultural item. Items with either higher loss rate or higher participation rate need to be lowered subsidy rate, which would contribute on sound fiscal management and stable insurance operation in the future.