The question of how insurance programs affect agricultural input use is commanding increasing attention. Previous studies disagree on the likely effects of insurance on fertilizer application rates. Whether insurance is a complement or a substitute for fertilizer depends, in part, on whether the probability of low yields is positively or negatively affected by increased fertilizer rates. This study uses field-level data measuring the response of corn yields to nitrogen fertilizer to determine if the technical relationship between yield and nitrogen fertilizer supports the hypothesis that crop insurance or revenue insurance could induce increased application rates. Our results indicate no support for this hypothesis. At all nitrogen fertilizer rates and reasonable levels of risk aversion, nitrogen fertilizer and insurance are substitutes, suggesting that those who purchase insurance are likely to decrease nitrogen fertilizer applications. Disciplines Agricultural and Resource Economics | Agricultural Economics | Economics | Insurance ABSTRACTThe question of how insurance programs affect agricultural input use is commanding increasing attention. Previous studies disagree on the likely effects of insurance on fertilizer application rates. Whether insurance is a complement or a substitute for fertilizer depends, in part, on whether the probability of low yields is positively or negatively affected by increased fertilizer rates. This study uses field-level data measuring the response of com yields to nitrogen fertilizer to determine if the technical relationship between yield and nitrogen fertilizer supports the hypothesis that crop insurance or revenue insurance could induce increased application rates. Our results indicate no support for this hypothesis. At all nitrogen fertilizer rates and reasonable levels of risk aversion, nitrogen fertilizer and insurance are substitutes, suggesting that those who purchase insurance are likely to decrease nitrogen fertilizer applications. INPUT DEMAND UNDER YIELD AND REVENUE INSURANCEThe effect of agricultural insurance on optimal per acre input levels is in dispute. The issue of how input decisions change under crop and revenue insurance schemes is attracting increased attention because of proposals to force farmers to rely more on insurance and less on direct government subsidies. For example, a group oflowa farmers and farm organizations has proposed the elimination of current commodity programs in favor of a plan that insures gross revenue. If optimal chemical use increases under insurance, as suggested by Horowitz and Lichtenberg, then it is likely that a move away from direct government payments and towards increased reliance on insurance will result in greater environmental pollution from agriculture. However, if optimal chemical use declines significantly under insurance, as concluded by Smith and Goodwin and Quiggins, Karagiannis, and Stanton, then the environment may benefit, but moral hazard issues will make the pricing of insurance difficult. 2The Horowitz ...

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The management practices farmers choose have significant effect on agricultural pollution. The authors analyze the adoption of alternative combinations of conservation practices and their impacts on fertilizer use, corn yield, and soil erosion in the Central Nebraska Basin, using a polychotomous-choice selectivity model. The results suggest that soil N testing and corn-legume rotation complement each other, but that the interaction between conservation tillage and rotation is more complicated. Th1s research was partially supported by the U.S. Environmental Protection Agency, Region VII. under C)orerati ve Agreement X007822-0 1-1. Abstract\Vbich management practices farmers adopt has a significant effect on agricultural pollution.

Farmers’ decisions about how much crop insurance to buy are not generally consistent with expected utility maximization. Taking into account both marginal risk benefits and marginal subsidy effects suggests that most farmers have chosen lower coverage levels than would be predicted by standard models. By modeling financial outcomes as gains and losses, cumulative prospect theory offers an alternative framework to perhaps better understand farmers’ purchase decisions. The role of the reference point that defines outcomes as either a gain or a loss, the degree of loss aversion, curvature of the value function, and the probability weighting function in determining optimal crop insurance coverage levels are explored for three representative farms calibrated to 2009 conditions. Loss aversion and how crop insurance is framed through choice of the reference point are shown to be the key factors that determine whether predictions from prospect theory are consistent with observed crop insurance coverage choices. When crop insurance is framed as a tool to manage farm risk then optimal choices under prospect theory are not consistent with observed choices. If crop insurance is framed as a stand‐alone investment where a loss is felt if the indemnity received is less than the premium paid, then prospect theory can generate optimal coverage level choices that are largely consistent with observed decisions. This result is shown to be robust to changes in parameterizations as long as loss aversion is maintained and if curvature of the value function is accompanied by decision weights that overweight low probability outcomes.

Growing demand for corn due to the expansion of ethanol has increased concerns that environmentally sensitive lands retired from agricultural production and enrolled into the Conservation Reserve Program (CRP) will be cropped again. Iowa produces more ethanol than any other state in the United States, and it also produces the most corn. Thus, an examination of the impacts of higher crop prices on CRP land in Iowa can give insight into what we might expect nationally in the years ahead if crop prices remain high. We construct CRP land supply curves for various corn prices and then estimate the environmental impacts of cropping CRP land through the Environmental Policy Integrated Climate (EPIC) model. EPIC provides edge-of-field estimates of soil erosion, nutrient loss, and carbon sequestration. We find that incremental impacts increase dramatically as higher corn prices bring into production more and more environmentally fragile land. Maintaining current levels of environmental quality will require substantially higher spending levels. Even allowing for the cost savings that would accrue as CRP land leaves the program, a change in targeting strategies will likely be required to ensure that the most sensitive land does not leave the program.