The Crowd-out Effect of Crop Insurance on Farm Survival and Profitability

The Federal Crop Insurance program has expanded dramatically over the past two decades---from $140 million in subsidies and 84 million acres covered to nearly $10 billion in subsidies and 260 million acres covered. The effect this has had on farmers' overall risk exposure and profitability is unclear. Self-selection and market dynamics have masked the direct effect of crop insurance. This paper uses numerous changes to the crop insurance program to isolate crop insurance's direct effect on risk exposure and, ultimately, profitability. I find that crop insurance increases debt holdings and acres cash rented and decreases the use of marketing contracts. Crop insurance has no effect on farm profitability. Taken together, crop insurance crowds out other risk-management strategies without improving farm profitability.