Should Governments Subsidize Agricultural Insurances

The aim of this study is to investigate the macroeconomic effects of state subsidies for agricultural insurance. From the policy’s point of view, the issue is important as this subsidy is a common and widely applied practice in many countries, though it does not exist in others; so the welfare effects of the subsidy need to be investigated—which investigation is the main contribution of the paper. A possible reason for this subsidy’s existence might be that agricultural insurances by themselves attain only a low penetration rate due to several factors, for example low-risk sensitivity, high premiums, and governments’ ad hoc subsidy policies. Thus, an enabling of risk management is an advantage of the subsidy. According to our results, agricultural insurance subsidizing does not have any significant welfare effect for the user and does not influence the economy’s output significantly; however, it is beneficial for agricultural producers, so one might wish to recommend such a policy if seeking to promote agriculture.