Unintended environmental benefits of crop insurance: Nitrogen and phosphorus in water bodies

Abstract

Agricultural policies without explicit environmental goals can indirectly affect the natural environment through its effect on farmer input use behavior. For example, the highly-subsidized crop insurance program in the United States (US), while developed to protect farmers against yield and revenue risks, also has the potential to influence fertilizer and land use decisions, which can then impact the extent of excess nitrogen and phosphorus that can run-off and pollute nearby water bodies. This study utilizes county-level panel data from 1989-2015 to directly evaluate the impact of crop insurance participation on nitrogen and phosphorus concentration in waterways. Results from linear panel fixed effects (FE) models suggest that counties with higher crop insurance participation tend to have lower nitrogen concentrations in its water bodies, but the effects are small. In contrast, we do not find a consistent statistically significant crop insurance effect on phosphorus concentrations. Findings based on alternative estimation techniques and other empirical specifications generally support our baseline FE model results. We posit that the modest crop insurance effects may be due to two competing mechanisms — the moral hazard effect of crop insurance (i.e., reducing fertilizer use), being counteracted by the incentive to bring in riskier crops or marginal land to production (i.e., increasing fertilizer use).