Abstract
This study develops a novel framework of heterogeneous producer attitudes towards risk to analyze different, stated and revealed, roles of crop insurance premium subsidies and underlying policy objectives of the government. The analysis reveals a strong connection and a complementarity between the roles of premium subsidies in increasing producer participation in crop insurance, inducing a desired separating equilibrium in the presence of asymmetric information, and transferring income to agricultural producers participating in the program. Developing an alternative design of premium subsidies that can achieve the stated government objective of increased producer participation and induce any desired separating equilibrium at significantly reduced costs, our study rejects the idea that the income redistribution taking place under the current policy design is necessary for increasing producer participation in crop insurance. Indeed, the current policy design reveals that premium subsidies are either a means of income redistribution or a policy failure.
Highlights
The U.S federal crop insurance is a major farm policy aimed at providing risk protection/ reduced risk exposure to agricultural producers [1, 2]
The analysis reveals a strong connection and a complementarity between the stated and revealed policy objectives of the government
The existence of such a mechanism rejects the idea that the income redistribution taking place under the current policy design is necessary for increasing producer participation in crop insurance
Summary
The U.S federal crop insurance is a major farm policy aimed at providing risk protection/ reduced risk exposure to agricultural producers [1, 2]. An important component of the crop insurance policy are the premium subsidies for the different crop insurance contract options These premium subsidies are designed to reduce the insurance costs to producers and, in their presence, the producer expected net returns function becomes: ERsi 1⁄4 ERP À bA ERls 1⁄4 ERP À wlð À slÞ À gA ERhs 1⁄4 ERP À whð À shÞ À dA under selfÀ insurance under lowÀ coverage crop insurance ð10Þ under highÀ coverage crop insurance where sl and sh are the government determined premium subsidies for low- and high-coverage crop insurance, respectively. The greater the premium subsidy for low-coverage crop insurance, the greater the share of producers that find it optimal to participate in crop insurance
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