Does Subsidized Crop Insurance Encourage Farmers to Take Risk?

This paper devises a tractable empirical framework to examine whether the highly subsidized crop insurance program by the United States government makes farmers more sensitive to changes in extreme heat and thereby limits their ability to cope with extreme heat or adapt to it. Insured farmers might not engage in the optimal protection against harmful extreme heat as the resulting crop losses are covered by the insurance program. . . Our results suggest a significant amount of moral hazard in federal crop insurance.

That's from a paper by Francis Annan and Wolfram Schlenker  just released in the American Economic Review proceedings issue.  The authors go on to write:

This has important implications: first, since the federal government encourages participation in the crop insurance program through premium subsidies, the presence of moral hazard implies that there will be additional cost to the program as losses exceed what they could have been without the program. Second, climate change will amplify the government induced distortion as it will increase the frequency of extremely hot temperatures. Third, our findings imply that there are possibilities to adapt to climate change as uninsured areas show lower sensitivities, but this adaptation potential is skewed by government programs that give a disincentive to engage in it. A farmer will choose subsidized yield guarantees over costly adaptation measures.