Agricultural Insurance and Soil Depletion in a Simple Dynamic Model

We study the effects of agricultural insurance on farm production choices, soil depletion and the environment when there are two related risks, one in short-to-medium run production revenues and the other in land value. The analysis considers "pure" and "truncating" insurance programs that stabilize linear combinations of short-run revenue risk and land price risk. Production-revenue-stabilizing insurance is often found to elicit increased farmer output, thus exacerbating environmental externalities and causing further soil depletion. Land-value-stabilizing insurance typically elicits lower output thus mitigating environmental externalities and pushing farmers closer to their complete-insurance output levels.