Description: Department Seminar

Location: 368A Heady Hall

Contact: John Crespi

Title: Optimizing Subsidy Rates in Federal Crop Insurance: Evidence from U.S. Corn

Abstract: The Federal Crop Insurance Program (FCIP) is the largest source of financial support in the U.S. agricultural sector, averaging $11.7 billion from 2015 to 2024, a nearly 50% increase from 2006 to 2014. Persistently high commodity prices and further recent increases in subsidy rates suggest these costs will continue to increase, raising concerns about the efficiency of the program.  This paper specifies and estimates a discrete choice demand model of crop insurance to evaluate the cost and farmer surplus impacts of changes to the FCIP. We estimate the model using publicly available data on insurance purchases by US corn producers in the nine major corn-producing states during the period 2011-2024. To address price endogeneity, we instrument average producer-paid premiums with Hausman-style actuarial base-level premium rates, as well as mean unit structure discount rates. Using the estimated demand model, we solve for the set of subsidy rates that minimize subsidy costs conditional on not reducing farmer surplus. The re-optimization of subsidy rates would generate savings of approximately $60 million per year in these nine states, equivalent to 4% of total subsidy costs. If we relax the surplus constraint by $5 per acre, subsidy costs could be reduced by over $500 million per year, equivalent to a 30% reduction. These findings highlight opportunities for policy reform to improve program efficiency while maintaining producer support.