Does crop insurance increase farmers’ income? Evidence from the pilot program of agricultural catastrophe insurance in China

Abstract

Historically, crop insurance programs have had limited coverage, reducing their effectiveness in protecting farmers from financial risks. In response to farmers’ demand for better coverage, China implemented pilot programs for agricultural catastrophe insurance in 2017 and 2019. Using county-level data from China, this study examines the impact of these catastrophe insurance initiatives on farmers’ income. Moreover, this study explores the underlying mechanisms and effects through which insurance promotes farmers' income across different regions. This study uses a two-way–fixed-effects (TWFE) model, alongside heterogeneity-robust–difference-in-differences (DID) estimation, propensity score matching–DID (PSM-DID), and a control function approach to validate the findings. Results show a significant improvement in farmers’ income, which is attributed to an increased willingness to invest in agricultural inputs and a strategic adjustment of cultivated land areas within the pilot counties. Furthermore, this study reveals that the positive impact is more pronounced in counties characterized by lower economic development, greater agricultural advancement, and lesser wealth prevalence. These findings provide empirical evidence that increasing crop insurance coverage levels can promote income growth for farmers and increase the production of grain. Furthermore, this study suggests expanding agricultural insurance coverage and building a stratified, nuanced framework that accommodates regional particularities.