The SURE program and incentives for crop insurance participation : A theoretical and empirical analysis

Purpose – The aim of this paper is to show how provisions of the Supplemental Revenue Assistance Payments (SURE) program impacts production practices, and empirically examine changes in crop insurance participation rates as a means of measuring producer responses to the program. Design/methodology/approach – The structure of the SURE program is described and a stylized theoretical model is used to show the SURE program's effects on farm‐level crop insurance and production decisions. A county‐level cross‐sectional empirical specification with regional fixed effects is used to test the hypothesis that producers who are most likely to benefit from production practice re‐optimization are more likely to participate in crop insurance. Findings – Results from empirical analyses of corn, soybean, and wheat production areas show that the SURE program has had substantial impacts on crop insurance participation by producers who are more likely to receive SURE indemnities and exploit moral hazard opportunities. Research limitations/implications – Because the program has only recently been introduced, empirical estimates of the program's long‐run impacts are not estimable. Practical implications – Results indicate that the program can have unexpected market consequences, with increased frequency and size of SURE indemnity claims than the Congressional Budget Office anticipated and increases in aggregate tax payer subsidies for both the crop insurance and SURE program. These outcomes can have important implications on motivating a restructuring of the program in the next farm bill. Social implications – Increased tax payer expenditures on the SURE and crop insurance programs in the form of subsidies can lead to non‐trivial reductions in social welfare. Originality/value – This research is the first to develop a rigorous model of the SURE program's impacts on producer responses and associated effects on crop insurance participation. The study also provides empirical evidence of these effects.