Abstract

In this study, a model of optimal allocation of subsidy was developed based on the microeconomic optimization theory. The model was evaluated by applying to premium subsidy allocation to the cereal crops’ (corn, rainfed barley and wheat, and irrigated barley and wheat) insurance in Iran. In developing the model, it was assumed that, policymaker on behalf of society, follows a social utility maximization in which the level of utility increases as the area coverage of insurance expands on the lands with higher productivity. In this model, in addition to subsidy budget constraint, information on farmers’ willingness to pay for insurance, which is reflected in their demand functions, is taken into account as a determining factor facing policymaker in achieving its objective. Results indicate that optimal allocation of premium subsidy is influenced by land productivity, level of actuarial premium, price elasticity of demand for insurance, and present insured areas. In addition, the optimal allocation of subsidy results in a redistribution of subsidy budget among different cereal producing regions and causes a more balanced distribution of funds among the regions. Finally, results reveal that, subsidy allocation targeted to improve productivity, increases budget allocation efficiency by %17.