On the Demand for Federal Crop Insurance

There are ongoing policy debates about why the Federal government subsidizes crop insurance, which effectively rests on our understanding of the market context of insurance demand. There is mounting empirical evidence about how price sensitive producers in the United States are to participating in crop insurance, generally suggesting a wide range of elasticities. Research challenges remain, however, and the existing evidence is relatively outdated. Most of these studies fail to address the endogenity of insurance premiums. We address these challenges and attempt to provide well-identified elasticity estimates that reflect current state of the world of the Federal crop insurance program, using a variety of methods. We explore the fraction of planted acreage insured as our main outcome of interest. Our preferred model which exploits exogenous variations from major Federal subsidy policy changes provides a demand elasticity of -0.79. The results are crucial for ongoing debates and have important policy implications for the Federal crop insurance program.