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Insurance and extraction incentives in a common pool resource: Evidence from groundwater use in the high plains

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  • Sloggy, Matthew R.
  • Hrozencik, R. Aaron
  • Manning, Dale T.
  • Goemans, Chris G.
  • Claassen, Roger L.

Abstract

Although insurance is an important risk management tool in many resource-dependent sectors, its connections to natural resource use are not well understood. We estimate the impact of US federal crop insurance pricing policy on the private use of common pool groundwater in the High Plains region of the United States. Field level panel data on insurance purchases and groundwater extraction allow us to exploit spatial discontinuities in insurance prices at county borders while instrumenting for endogenous prices. A theoretical model describes the mechanisms connecting insurance and resource extraction through groundwater intensity and irrigated acreage. Empirical results demonstrate that a 1% increase in irrigated insurance prices decreases total groundwater use by 0.501%, irrigated acreage by 0.266%, and irrigation per acre by 0.283%. Simulation results suggest that reducing subsidies for irrigated insurance by a recently considered 6.2 percentage points decreases groundwater use by 7.47%. These results suggest that insurance price subsidies may have unintended consequences for natural resource use but could be designed to complement conservation objectives.

Suggested Citation

  • Sloggy, Matthew R. & Hrozencik, R. Aaron & Manning, Dale T. & Goemans, Chris G. & Claassen, Roger L., 2025. "Insurance and extraction incentives in a common pool resource: Evidence from groundwater use in the high plains," Journal of Environmental Economics and Management, Elsevier, vol. 130(C).
    • Handle: RePEc:eee:jeeman:v:130:y:2025:i:c:s0095069625000099
    DOI: 10.1016/j.jeem.2025.103125
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    Keywords

    Insurance; Groundwater; Risk management; Resource management;
    All these keywords.

    JEL classification:

    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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