Are the Federal Crop Insurance Subsidies Equitably Distributed? Evidence from a Monte Carlo Simulation Analysis
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This study hypothetically analyzes the distribution of the premiums paid and thus the subsidies
received by farmers participating in the Risk Management Agency (RMA) multi-peril crop
insurance program. The results show a wide spread in the effective subsidy levels, to where
some producers might not be receiving any subsidies at all (i.e., they actually pay close to their
full actuarially fair premium), while others only pay a small fraction of their actuarially fair
premium. More importantly, the results show that “shrinkage” estimators such as the one used
by the RMA have the unintended negative consequence of disproportionally subsidizing farmers
who are less effective in managing risk. Producers whose farms exhibit higher downside yield
variability receive much more generous subsidies than those with lower levels of yield variability.