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We study the effects of agricultural insurance on farm production choices, soil depletion and the environment when there are two related risks, one in short-to-medium run production revenues and the other in land value. The analysis considers "pure" and "truncating" insurance programs that stabilize linear combinations of short-run revenue risk and land price risk. Production-revenue-stabilizing insurance is often found to elicit increased farmer output, thus exacerbating environmental externalities and causing further soil depletion. Land-value-stabilizing insurance typically elicits lower output thus mitigating environmental externalities and pushing farmers closer to their complete-insurance output levels.

Using a simple model of production under uncertainty, this paper studies the effects of agricultural insurance on farm production choices, soil depletion and the environment. Unlike prior studies of production under uncertainty, this paper allows for two related risks, one in short-to-medium run production revenues and the other in asset/land value. The analysis characterizes effects of insurance programs which stabilize either, both or linear combinations of short-run revenue risk and land price risk. In addition, the paper illustrates the prospective role and importance of land price risk in the determination of insurance program impacts, while distinguishing between effects of “pure” stabilizing insurance and the “truncating” types of insurance that are observed in practice.