RESOURCE ALLOCATION AND CROP INSURANCE
Abstract
The topic of this study is crop insurance and its effect on resource allocation. By crop insurance we mean insurance programs that are intended to protect farmers against variation in the yield of their crops. We will not consider insurance programs intended to protect farmers against variation in commodity prices. Attention is focused on crop insurance in order to emphasize several important concepts free from entanglements. By effect on resource allocation we mean the change in optimal input use that is caused by insurance. This change is complicated by the asymmetry in information between the insurer and the farmer. Information asymmetry complicates matters because it creates the possibility of the farmer taking actions undesirable to the insurer, without being detected. The possibility of such actions reduces the social benefits of insurance because it prevents Pareto efficient risk sharing from being achieved. Society and individuals desire insurance because individuals can be made better off by exchanging risk portfolios, just as individuals are made better off by exchanging commodities. The federal government has chosen to offer farmers crop insurance because people believe that the country is better off if the risks borne by farmers are reduced.
Degree
Ph.D.
Subject Area
Agricultural economics
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