Wednesday, January 16, 2013

Crop Insurance and Moral Hazard and Climate Adaptation

The U.S Federal Crop Insurance program will be making huge payouts to farmers due to the 2012 drought. Permit me to say something nasty.  This program creates moral hazard as insured farmers (at subsidized rates thanks to tax payers) have less of an incentive to adapt to anticipated drought conditions. If farmers face actuarial prices for insurance, I bet that they would be more pro-active in investing in crops and output that is  more drought resistant.  They would also have an incentive to migrate to areas where yields might be less sensitive to new climate conditions. In this sense, government insurance impedes climate adaptation.  This point is similar to my discussion of Hurricane Sandy and FEMA efforts. Good intentions can block progress!