Are the federal crop insurance subsidies equitably distributed? Evidence from a Monte Carlo simulation analysis

Octavio A. Ramirez, Carlos E. Carpio, Alba J. Collart

Research output: Contribution to journalArticle

3 Scopus citations

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.

Original languageEnglish
Pages (from-to)457-475
Number of pages19
JournalJournal of Agricultural and Resource Economics
Volume40
Issue number3
StatePublished - Sep 2015

Keywords

  • Agricultural subsidies
  • Crop insurance premiums
  • Farmer welfare
  • Risk management agency

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