RISK MANAGEMENT THROUGH INSURANCE AND ENVIRONMENTAL EXTERNALITIES FROM AGRICULTURAL INPUT USE: AN ITALIAN CASE STUDY

The biological nature of agricultural production processes induce a higher degree ofuncertainty surrounding the economic performance of farm enterprises. This has contributedto the development and acceptance of forms of public intervention aimed at reducing incomevariability that have no parallel in other sectors of the economy.In particular, subsidized crop insurance are a widely used tool. The impact of theseprograms on the decisions of production generates effects on input use, land use and thus,indirectly, environmental outcomes.The importance of this issue has grown in parallel with the growth in importance ofthe collective role of agriculture sector that has addressed the recent guidelines adopted bymany developed countries. To examine the effects of public risk management programs onoptimal nitrogen fertilizer use and land allocation to crops, this study carried out an empiricalanalysis by developing a mathematical programming model of a representative wheat-tomatofarm in Apulia southern region of Italy.The model endogenizes nitrogen fertilizer rates and land allocation, as well as theinsurance coverage levels, participation in insurance programs and the EnvironmentalPayment (EP). This study utilized direct expected utility maximizing non-linear programmingin combination with a simulation approach.Results show that with current crop insurance programs, the optimal nitrogen fertilizerrate slightly increases and the optimal acreage substantially increases for tomato whereasdecrease for wheat. Assuming that the environmental negative effects of crop insurance arepositively related to nitrogen fertilizer use, this type of public intervention implies negativeenvironmental effects.