Input Demand Under Yield and Revenue Insurance

Bruce A. Babcock, Joseph A. Herriges
December 1994  [94-WP 127]

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.

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