Does the Samaritan’s Dilemma Matter? Evidence from Crop Insurance

The theory of the Samaritan’s dilemma posits a downside to private or public charity: recipients may begin to rely on free aid instead of their own efforts. An important application is government aid. When the government acts as an “insurer of last resort”, potential beneficiaries may reduce private insurance coverage and instead rely on the government to bail them out. This phenomenon can increase the cost and impact of negative shocks. Anecdotally, it is thought to be an important explanation for the relatively low rates of insurance take-up in some markets, but empirical evidence is scarce. We estimate whether the Samaritan’s dilemma is present in agriculture, where both private crop insurance and frequent federal disaster assistance are present. We use political variation within a county to instrument for disaster aid and subsequently identify the causal relationship between disaster aid and insurance coverage. We find that bailout expectations are qualitatively and quantitatively important for the insurance decision, especially on the intensive margin. JEL codes: D72, H84, Q18. ∗University of Illinois at Urbana-Champaign. We thank David Albouy, Jeff Brown, Don Fullerton, Nolan Miller, and Julian Reif for helpful discussions and comments. We are grateful to seminar participants at the American Economic Association Meetings, the Midwestern Economics Association Meetings, the Institute of Government and Public Affairs, Kansas State University, the University of British Columbia, and the University of Illinois. Xian Liu provided excellent research assistance.