Agricultural production behavior under premium subsidy: Incorporating crop price when subsistence constraint holds

Producers’ acreage decisions in response to the availability of insurance and government subsidy has been a topic of considerable attention. This study revisits the issue of agriculture producers’ production behavior under crop insurance and premium subsidy conditions. The discussion begins by differentiating between the assumptions of the classic insurance model and that model’s application to crop insurance. A discussion of a closed dual economy model follows. Price difference in cases of disaster and no disaster essentially determines producers’ response to the availability of a premium subsidy. A producer can obtain higher production revenue due to the significant increase in price induced by yield loss if the economy is closed and a subsistence constraint is taken into account. In this case, a premium subsidy could induce producers to lower their output level. The result is further generalized by two model extensions in which assumptions are relaxed to allow openness in the economy or intertemporal storage of grains with grain reserve policy. The findings of this article suggest that governments should carefully examine the actual risk-bearing pattern of crop producers before any subsidy policy is implemented.