Agricultural Insurance and Soil Depletion in a Simple Dynamic Model
1994
Innes, Robert | Ardila, Sergio
We study the effects of agricultural insurance on farm production choices, soil depletion and the environment when there are two related risks, one in short‐to‐medium run production revenues and the other in land value. The analysis considers “pure” and “truncating” insurance programs that stabilize linear combinations of short‐run revenue risk and land price risk. Production‐revenue‐stabilizing insurance is often found to elicit increased farmer output, thus exacerbating environmental externalities and causing further soil depletion. Land‐value‐stabilizing insurance typically elicits lower output thus mitigating environmental externalities and pushing farmers closer to their complete‐insurance output levels.
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