The publicly subsidized Federal Crop Insurance Program has expanded rapidly in recent decades in the United States. With the reform in the 2014 Farm Bill, the Federal Crop Insurance Program has become the most important component of U.S. farm policies. The primary goal of the program is to provide risk protections for farmers. However, there is sporadic evidence of welfare costs associated with the program due to moral hazard, adverse selection, deadweight loss from the subsidy transfer and transaction costs. To provide a complete and systematic assessment, it requires a thorough theoretical understandings and credible empirical measurement of the welfare effect of the Federal Crop Insurance Program. We apply the sufficient statistics approach to consolidate various welfare effects of crop insurance and to provide quantitative evidence for the welfare analysis. We analyze a model in a setting where information asymmetry and systemic risk form an adverse environment for private sectors to provide insurance and therefore create a need for government intervention. From the model, we derive the condition for optimal contract and identify key parameters that affect the welfare effects of risk protection, information asymmetry, and premium subsidy. The results not only provide policy implications and but also suggest the key parameters needed for measuring the welfare effect of publically provided crop insurance programs empirically. To measure the welfare effect of the Federal Crop Insurance Program, we need to understand how the program affects the distribution of revenue. To this end, a moment-based approach is used to estimate the reduced-form equations of the first two moments of revenue distributions using farm-level Agricultural Census data from the U.S. Heartland region for 2002, 2007 and 2012. The control function approach is applied to control for the endogeneity problem caused by the self-selection of insurance coverage, under the assumption that selection into different coverage level is based on a set of observed covariates and time-invariant factors. Our results show that increase in coverage level is associated with a lower mean and higher variability of farm revenue per acre. The impacts of insurance coverage on the revenue distribution, as a reduced-form representation of the moral hazard, suggest a welfare loss. Other key parameters affecting marginal welfare effects of the Federal Crop Insurance Program include risk attitude parameters, insurance demand elasticity with respect to price, the impacts of insurance coverage on the production outcomes, marginal welfare cost of deadweight loss, and loading factors. We collect the information on the range of the values of these parameters from existing literatures. The Bootstrap method is applied to estimate marginal welfare effects discussed in the conceptual model. The results suggest that under the current policy setting, the net marginal welfare effects of coverage level and subsidy rate are both negative, suggesting that both the coverage level and the subsidy rate are greater than their optimal level. However, from farmers’ perspectives, the current risk protection level is appropriate.

Abstract: If the extension of federal crop insurance programs to cover fruit and vegetable production has affected either producer or consumer welfare, then we would expect to see this reflected in output and prices. Exploiting variation in the timing of program introduction in different locations for different crops to estimate the effect of crop insurance on the output and prices of the insured crops

This dissertation develops a novel theoretical framework of heterogeneous producers to analyze the system-wide market and welfare effects of crop insurance and the determinants of the optimal policy design under alterative information structures and government policy objectives. The framework captures the empirically relevant differences in producer attitudes towards risk and their impact on crop insurance participation under different insurance contracts and premium subsidies. The explicit consideration of producer heterogeneity enables also the proper identification and disaggregation of the distributional impacts of crop insurance, and the evaluation of the role of multiple contracts and premium subsidies in policy design. Analytical results indicate that producer welfare gains from crop insurance increase with the level of producer risk aversion and insurance coverage. The provision of different crop insurance contracts results in a separating equilibrium, where different producer groups choose different contracts. The disaggregated welfare impacts of changes in contract availability are determined by the relative differences in premium rates and reduction in risk exposure among the insurance options. Changes in premium subsidies are shown to cause contract-specific participation and welfare changes, with asymmetric benefits for the different policy participants. Regarding the optimal policy design, the study identifies (a) the determinants of the optimal level of premium subsidies and (b) their role in coping with informational asymmetries, under different objectives and political preferences of the government. The analysis shows how premium subsidies can be utilized to induce producer behavior leading to a desired separating equilibrium and presents an alternative policy design that can more efficiently achieve the government objective of increased producer participation in crop insurance. Finally, by utilizing highly detailed crop insurance data, the study empirically tests and quantifies the system-wide effects of crop insurance, the impact of premium subsidies on participants' welfare, and identifies crop and regional differences. Empirical results are consistent with/support the theoretical findings indicating that producer benefits from crop insurance increase with the level of producer risk aversion, high coverage and regional riskiness. The change in the magnitude of premium subsidies in 2000 resulted in increased producer welfare and spatial differences in private insurers' returns.

This study is the first to provide a comprehensive and in-depth economic analysis of the origins and consequences of U.S. crop insurance and disaster relief programs. The authors investigate the policy options for disaster assistance and crop insurance, beginning with the recognition that current policies are unsatisfactory.