Does Federal Crop Insurance Encourage Farm Specialization and Fertilizer and Chemical Use?
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Federally subsidized crop insurance has expanded in recent decades, with annual premium subsidies increasing from roughly $1 to $7 billion dollars between 2000 and 2013. The 2014 Farm Act further expanded crop insurance, making it the main conduit of financial support to farmers. Although designed for non-environmental goals, subsidized insurance may affect the use of land, fertilizer, and agrochemicals and therefore environmental externalities from agriculture such as nutrient and chemical runoff into lakes and streams. We use a newly constructed farm-level panel data set to examine farmer responses to changes in insurance coverage. Identification comes from an instrumental variable approach that exploits program limits on coverage, which constrained the response of some farmers to increasingly generous subsidies more than others. Our estimates indicate that expanded coverage had a small, if any, effect on farm decisions such as fertilizer and chemical use.