Does crop insurance inhibit climate change technology adoption?

Sarah C. Sellars, Nathanael M. Thompson (), Michael E. Wetzstein, Laura Bowling, Keith Cherkauer, Charlotte Lee, Jane Frankenberger and Ben Reinhart
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Sarah C. Sellars: University of Illinois
Nathanael M. Thompson: Purdue University
Michael E. Wetzstein: Purdue University
Laura Bowling: Purdue University
Keith Cherkauer: Purdue University
Charlotte Lee: Purdue University
Jane Frankenberger: Purdue University
Ben Reinhart: Purdue University

Mitigation and Adaptation Strategies for Global Change, 2022, vol. 27, issue 3, No 5, 20 pages

Abstract: Abstract Changing temperatures and precipitation patterns from climate change are a major risk to crop yields. Producers have technology options for mitigating this risk with one such technology termed drainage water recycling (DWR). DWR involves diverting subsurface drainage water to ponds where it is stored for later irrigation. Crop insurance may interfere with DWR adoption by providing producers with another avenue to manage climate change risk. It is hypothesized that government-subsidized crop insurance reduces climate change technology adoption. Based on real options, this analysis considers two policy regimes: when crop insurance is in effect and not. In a Poisson jump process, it further considers the insurance effect of producers’ returns jumping when facing a crop disaster. Results indicate crop insurance has a minimal effect on DWR adoption, and in most scenarios, the DWR adoption thresholds are too large for a producer to invest for climate change adaptation without additional financial incentives. The baseline DWR adoption scenario, with no crop insurance impact, requires revenue of $1,114/acre, or 1.57 times current conventional revenue.

Keywords: Asset investment; Climate change; Crop insurance; Real options analysis; Technology adoption (search for similar items in EconPapers)
JEL-codes: Q54 Q55 Q58 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11027-022-09998-1

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