The impact of crop insurance on farm financial outcomes

We 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 bal...

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Bibliographic Details
Published in:Applied economic perspectives and policy 2023-03, Vol.45 (1), p.579-601
Main Authors: DeLay, Nathan D., Brewer, Brady, Featherstone, Allen, Boussios, David
Format: Article
Language:English
Subjects:
Balancing
Crop insurance
Crops
farm debt
Farm management
Farms
Insurance
Liability
Risk
risk balancing
Simultaneous equations
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Summary:We 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.
ISSN:2040-5790
2040-5804
DOI:10.1002/aepp.13223