Insurance and extraction incentives in a common pool resource: Evidence from groundwater use in the high plains

Although insurance is an important risk management tool in many resource-dependent sectors, its connections to natural resource use are not well understood. We estimate the impact of US federal crop insurance pricing policy on the private use of common pool groundwater in the High Plains region of the United States. Field level panel data on insurance purchases and groundwater extraction allow us to exploit spatial discontinuities in insurance prices at county borders while instrumenting for endogenous prices. A theoretical model describes the mechanisms connecting insurance and resource extraction through groundwater intensity and irrigated acreage. Empirical results demonstrate that a 1% increase in irrigated insurance prices decreases total groundwater use by 0.501%, irrigated acreage by 0.266%, and irrigation per acre by 0.283%. Simulation results suggest that reducing subsidies for irrigated insurance by a recently considered 6.2 percentage points decreases groundwater use by 7.47%. These results suggest that insurance price subsidies may have unintended consequences for natural resource use but could be designed to complement conservation objectives.