Using insurance to enhance nitrogen fertilizer application to reduce nitrogen losses to the environment

The advantage of using insurance to help a farmer adopt a best nitrogen man agement plan (BNMP) that reduces the impact of agricultural production on t he environment is analytically and empirically demonstrated. Using an expec ted value analysis, it is shown that an insurance program can be structured so as to reduce a farmer's cost of bearing the adoption risk associated wi th changing production practices and, thus, to improve the farmer's certain ty equivalent net return thereby promoting the adoption of a BNMP. Using th e adoption of growing-season only N fertilizer application in Iowa as a cas e study, it is illustrated how insurance may be used to promote the adoptio n of this practice to reduce N fertilizer use. It is shown that it is possi ble for a farmer and an insurance company both to have an incentive to deve lop an insurance adoption program that will benefit both the farmer and the insurance company, increasing net social welfare and improving environment al quality in Iowa.