The potential for moral hazard behavior in irrigation decisions under crop insurance

The design of federal crop insurance has attracted the interest and attention many economists policymakers in United States. Moral hazard is a frequently cited concern, as may reduce incentive for farmers to manage properly their agricultural operation. could play role irrigation decisions by incentivizing farmer choose riskier management strategy, potentially affecting long-term sustainability water resources. We use numerical simulation determine if coverage affects incentives on seasonal use. Results show that potential moral at current costs policy parameters low, but there behavior when cost high. Hence, conservation policies increase (e.g., tax) amplify hazard. In most cases, provides secondary effect reduces addition direct tax effect, although this reduction comes increased taxpayer expense. However, it possible increases under insurance. Therefore, need explicit consideration unintended side effects farmers’ decisions, particularly regions experiencing scarcity rising marginal irrigation.