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Are the Federal Crop Insurance Subsidies Equitably Distributed? Evidence from a Monte Carlo Simulation Analysis

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  • Ramirez, Octavio A.
  • Carpio, Carlos E.

Abstract

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.

Suggested Citation

  • Ramirez, Octavio A. & Carpio, Carlos E., 2015. "Are the Federal Crop Insurance Subsidies Equitably Distributed? Evidence from a Monte Carlo Simulation Analysis," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 40(3), pages 1-19, September.
    • Handle: RePEc:ags:jlaare:210551
    DOI: 10.22004/ag.econ.210551
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    References listed on IDEAS

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    1. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economic Reports 34081, United States Department of Agriculture, Economic Research Service.
    2. Plastina, Alejandro & Hart, Chad E., 2014. "Crop Insurance in Iowa," Staff General Research Papers Archive 38302, Iowa State University, Department of Economics.
    3. Ramirez, Octavio A. & Carpio, Carlos E. & Rejesus, Roderick M., 2011. "Can Crop Insurance Premiums Be Reliably Estimated?," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 40(1), pages 1-14, April.
    4. Octavio A. Ramirez & Carlos A. Carpio, 2012. "Premium estimation inaccuracy and the actuarial performance of the US crop insurance program," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 72(1), pages 117-133, May.
    5. Lu, Yue & Ramirez, Octavio A. & Rejesus, Roderick M. & Knight, Thomas O. & Sherrick, Bruce J., 2008. "Empirically Evaluating the Flexibility of the Johnson Family of Distributions: A Crop Insurance Application," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 37(1), pages 1-13, April.
    6. Goodwin, Barry K., 1994. "Premium Rate Determination In The Federal Crop Insurance Program: What Do Averages Have To Say About Risk?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(2), pages 1-14, December.
    7. Barry J. Barnett, 2000. "The U.S. Federal Crop Insurance Program," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 48(4), pages 539-551, December.
    8. Octavio A. Ramírez, 1997. "Estimation and Use of a Multivariate Parametric Model for Simulating Heteroskedastic, Correlated, Nonnormal Random Variables: The Case of Corn Belt Corn, Soybean, and Wheat Yields," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 191-205.
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    Cited by:

    1. Smith, Vincent, 2017. "The US Federal Crop Insurance Program: A Case Study in Rent-Seeking," Working Papers 06899, George Mason University, Mercatus Center.
    2. Ramirez, Octavio A. & Shonkwiler, J. Scott, 2017. "A Probabilistic Model of Crop Insurance Purchase Decision," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 42(1), pages 1-17, January.

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