Abstract
This study shows that uninsured risk is a driver of within-firm factor input misallocation, even in a context with near-complete factor and credit markets. Using operation-level microdata from the U.S. agricultural sector and regulatory thresholds for identification, we find that increases in insurance use allow operations to increase physical capital investment and reduce total labor use. Our analysis of enterprise value suggests that this reallocation is value-enhancing and is driven by changes in each factor's returns. The decline in total labor use is due to a reduction in supplemental labor; managerial labor increases. Operations fund capital investments using internal savings rather than external capital, implying that reducing cash flow risk, not financial constraints or a declining cost of capital, is the channel through which insurance spurs these changes. Our results identify a significant economic cost of risk and highlight a key benefit of government-sponsored insurance.