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ARPA Subsidies, Unit Choice, and Reform of the U.S. Crop Insurance Program

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Publication date
02/02/2005
Number of Pages
24
Language:
English
Type of Publication:
Studies
Focus Region:
North America
Focus Topic:
Market / Trade
Type of Risk:
Policy & institutional
Biological & environmental
Type of Risk Managment Option:
Risk transfer
Commodity:
Crops
Author
Bruce A. Babcock, Chad E. Hart
Organization
Center for Agricultural and Rural Development (CARD)

The Agricultural Risk Protection Act (ARPA) has largely met its objectives of inducing farmers to increase their use of the crop insurance program. Both insured acreage and coverage levels have increased dramatically in response to ARPA’s large increase in premium subsidies. An unintended consequence of the larger subsidies is a dramatic increase in the incentive for farmers to insure their crops under optional units, that is, insurance at the field level rather than at the farm or crop level. The majority of farmers are therefore choosing optional unit coverage even though the alternative unit structures provide identical insurance guarantees at a substantially lower cost. We consider two policy options to eliminate the unintended consequences of ARPA subsidies. The author argues that program integrity would be increased by dramatically increasing the incremental cost of farmers insuring their crops under optional units.