There have long been concerns that federal crop insurance subsidies may significantly impact land use decisions. It is well known that classical insurance market information asymmetry problems can lead to a social excess of risky land entering crop production. We provide a conceptual model to show that the problem will arise absent any information failures. This is because the subsidy is (a) proportional to acres planted, and (b) greatest for the most production risky land. Using field-level yield data, we follow this observation through to establish the implications of subsidies for the extent of crop production, with particular emphasis on the US Prairie Pothole Region, where cropland growth is likely to have marked adverse environmental impacts. Simulation results show that up to 3% of land under federal crop insurance would have not been converted from grassland if there had been no crop insurance subsidies. Sodsaver, a provision that eliminates crop insurance and Supplemental Revenue Assistance payments in the first five years of crop production on new breakings, will reduce grassland conversion by 4.9% or less.
Miao, Ruiqing; Hennessy, David A.; and Feng, Hongli, "The Effects of Crop Insurance Subsidies and Sodsaver on Land Use Change" (2012). CARD Working Papers. 551.