Climate, insurance and innovation: the case of drought and innovations in drought-tolerant traits in US agriculture

This paper investigates the effects of crop insurance on agricultural innovation (namely, drought-tolerant traits) in the context of climate change. A conceptual framework is developed to model the market equilibrium of agricultural innovations. Hypotheses derived are then tested by using data for US agriculture. We find that the US agricultural sector responds to climate variation by increasing innovation activities, but this response is weakened by subsidised crop insurance by about 23 per cent. This indicates that crop insurance may have an unintended crowding-out effect as an option of risk management and may inhibit societies' long-run capacity to adapt to climate change.