Production Risk and Input Use: Impact of Subsidies and Crop Insurance

Douadia Bougherara | INRA, France

We study the impact of subsidies and crop insurance on the use of two types of inputs: risk decreasing and risk increasing. This research question is not new in agricultural economics. However, although theoretical predictions are established, the empirical evidence is not clear-cut. We argue that advances in experimental economics can give new insights on that issue. Our experimental approach allows dealing with three severe issues that face agricultural economists when using production data. First, the separate identification of risk preferences and technologies is possible in the lab since the experimenter controls for the parameters of the production function and for risk. Second, we overcome simultaneity issues such as the simultaneous choice of input use and crop insurance using a careful design of treatments in the lab. Third, we escape theselection bias issue by imposing mandatory insurance in some treatments as compared to others without insurance. We carry out 8 sessions where subjects choose the level of risk decreasing or risk increasing input to maximize profits under three types of treatments: Benchmark, Subsidy and Insurance (actuarially fair yield insurance). We also elicit subjects’ risk preferences using binary lottery choices. First results show that risk averse subjects do not behave differently than other subjects except in the Benchmark treatment in the risk-decreasing input case; subjects use more risk decreasing input than other subjects in the Benchmark treatment. If we consider risk averse subjects, we find that the subsidy increases the use of the risk-increasing input but has no significant impact on the use of the risk-decreasing input. For risk averse subjects, insurance appears to be a substitute to the use of the risk-decreasing input and a complement to the use of the risk-increasing input use but the impact is not significant.