The Impact of Crop Insurance on Commercial Bank Loan Volumes
AAEA members release new research in AEPP
Agricultural lenders and other farm sector stakeholders frequently discuss the importance of crop insurance in agricultural finance. Previous research has considered the farm-level relationship between crop insurance use and farm debt levels and financial status. A new study developed a theoretical mode that explains the role of crop insurance in agricultural lending and how impacts may be different for lenders that are not specialized in agriculture. The study tested whether the total volume of production credit extended by commercial banks at the county level increased in response to crop insurance availability and whether the level of the response is related to bank specialization in agriculture.
In the new article “The impact of crop insurance on commercial bank loan volumes: theory and evidence” released in the Applied Economic Perspectives & Policy, Jennifer Ifft from Kansas State University, Todd Kuethe from Purdue University, Greg Lyons from George Washington University, Alexander Schultz from Mercaris, and John Y. Zhu, University of Kansas, find out if crop insurance impacts commercial bank loan volumes.
The authors state, “In the theory section, we showed how, by increasing the likelihood of loan repayment, crop insurance allows lenders to extend more operating credit. Further, we show that crop insurance may be especially useful to lenders who have more difficulty assessing the likelihood of loan repayment. In the empirical section, we found that crop insurance availability had a strong relationship with increased commercial bank loan volumes during our study period (1992-1998), especially in counties with fewer banks specialized in agriculture.”
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ABOUT AAEA: Established in 1910, the Agricultural & Applied Economics Association (AAEA) is the leading professional association for agricultural and applied economists, with 2,500 members in more than 60 countries. Members of the AAEA work in academic or government institutions as well as in industry and not-for-profit organizations, and engage in a variety of research, teaching, and outreach activities in the areas of agriculture, the environment, food, health, and international development. The AAEA publishes three journals, the Journal of the Agricultural and Applied Economics Association (an open access journal), the American Journal of Agricultural Economics and Applied Economic Perspectives & Policy, as well as the online magazine Choices and the online open access publication series Applied Economics Teaching Resources. To learn more, visit www.aaea.org.
Contact: Allison Ware
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