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United States Department of Agriculture

Agricultural Research Service

Title: Economic Evaluation of Bt Corn Refuge Insurance

Authors
item Mitchell, Paul - TEXAS A&M UNIVERSITY
item Hurley, Terrance - UNIVERSITY OF MINNESOTA
item Hellmich, Richard

Submitted to: American Journal of Agricultural Economics
Publication Type: Peer Reviewed Journal
Publication Acceptance Date: October 15, 2000
Publication Date: N/A

Interpretive Summary: The EPA has imposed mandatory refuge requirements for Bt crops to prolong the efficacy of Bt, but growers have no economic incentive to plant the required refuge because refuge crops are on average less productive and more risky. This paper evaluates refuge insurance, insurance that pays indemnities for yield losses on refuge due to insect damage, as a tool to increase grower compliance incentives. Our analysis indicates that a private market for refuge insurance is unlikely. For refuge insurance to provide significant compliance incentives, conventional insurance products must be restructured to draw premiums from sources other than grower risk premiums.

Technical Abstract: The EPA has imposed mandatory refuge requirements for Bt crops to prolong the efficacy of Bt, but growers have no economic incentive to plant the required refuge because refuge crops are on average less productive and more risky. This paper evaluates refuge insurance, insurance that pays indemnities for yield losses on refuge due to insect damage, as a tool to increase grower compliance incentives. We determine actuarially fair insurance premiums, then evaluate the feasibility of private provision of refuge insurance and its impact on grower incentives to comply with refuge requirements. Our analysis indicates that a private market for refuge insurance is unlikely because even a 2% load on the actuarially fair premium makes growers unwilling to buy refuge insurance, which is insufficient for insurance companies to cover administrative costs and earn a normal return. We find that the primary benefit of Bt corn is to increase eexpected yield and not reduce risk. As a result, even actuarially fair refuge insurance increases grower compliance incentives less than 3%, since refuge insurance only reduces risk. For refuge insurance to provide significant compliance incentives, conventional insurance products must be restructured to draw premiums from sources other than grower risk premiums.

Last Modified: 7/25/2014
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