AGRICULTURAL INSURANCE AND SOIL DEPLETION IN A SIMPLE DYNAMIC-MODEL

We study the effects of agricultural insurance on farm production choi ces, soil depletion and the environment when there are two related ris ks, one in short-to-medium run production revenues and the other in la nd 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 ofte n found to elicit increased farmer output, thus exacerbating environme ntal externalities and causing further soil depletion. Land-value-stab ilizing insurance typically elicits lower output thus mitigating envir onmental externalities and pushing farmers closer to their complete-in surance output levels.