Abstract
AbstractWe use data from the Kansas Farm Management Association to estimate the impact of crop insurance liability and insurance indemnities on farm debt. Subsidized crop insurance may increase farms' financial risk through a mechanism known as “risk balancing.” Previous findings in support of risk balancing may suffer from bias due to unobservable farm characteristics and simultaneity in insurance and debt decisions. Employing a simultaneous equations model with farm fixed effects, we find no statistical relationship between crop insurance liability and debt, calling into question the risk balancing hypothesis in federal crop insurance. We show that large insurance indemnity payments reduce farms' reliance on short‐term debt, but leave the total debt level unchanged.
Highlights
Introduction and MotivationThe US government provides subsidies for farmers to purchase crop insurance that results in roughly 300 million acres and $100 billion of liability covered each year
While agricultural economists generally recognize that farming is a risky endeavor due to uncertain weather, pests, and prices, the impact on farm well-being of insuring those risks with crop insurance are less wellknown
Kim et al (2017) find that farms that use crop insurance survive seven years longer than farms that do not and reduce their probability of farm exit by about 70%. These findings show the positive impact of crop insurance on farm survival and business risk, namely through the avenue of increased liquidity
Summary
Selected Paper prepared for presentation at the 2019 Agricultural & Applied Economics Association Annual Meeting, Atlanta, GA., July 22-July 24. The findings and conclusions in this conference paper are those of the author(s) and should not be construed to represent any official USDA or U.S Government determination or policy
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