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The theory and practice of green insurance: insurance to encourage the adoption of corn rootworm IPM

Paul Mitchell ()

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Best management practices exist that increase profit and improve the environmental performance of agriculture by increasing input use efficiency. Nevertheless, few producers adopt these best management practices. The risks involved with the adoption and use of these new best management practices are often thought to contribute to this low adoption rate. This dissertation theoretically and empirically analyzes the potential for best management practice insurance---green insurance---to provide insurance coverage against the failure of the practice, thus substantially reducing the risks involved with its adoption and use. Best management practice insurance removes, or at least reduces, a potentially significant factor hindering the adoption of the practice;A general model of stochastic production focused on optimal input use is developed to theoretically analyze the impact of best management practice insurance on producer incentives to adopt the practice and on optimal input use. Theoretical results are summarized in a series of propositions, but often the sign and magnitude of important effects are theoretically ambiguous, and empirical analysis is required;A stochastic dynamic corn rootworm population model is developed to empirically analyze corn rootworm integrated pest management (IPM). Monte Carlo simulations are used to evaluate the potential for IPM insurance to encourage producers to adopt corn rootworm IPM and reduce insecticide use. Depending on the plant day and location, for producers annually applying soil insecticides, corn rootworm IPM is worth on average 10 to 7.50 per acre, not including the cost of IPM scouting, and reduces insecticide application 75% to 95%. Depending on the plant day and location, actuarially fair IPM insurance requires a premium of 2.15 to 4.50 per acre and is worth 0.30 to 0.60 per acre to producers. Unfortunately, once the actuarially fair premium is increased to make the insurance feasible for private insurance companies to provide, producers are no longer willing to purchase the IPM insurance. This occurs because profit losses occurring when IPM fails are generally small, and thus the value to producers of the risk sharing benefits of IPM insurance is small.

Date: 1999-01-01
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Handle: RePEc:isu:genstf:1999010108000013154