Demand for crop insurance and contract design: A case study for corn in Indiana
Abstract
Multiple peril crop insurance has been a major program of the federal government for dealing with agricultural production risk. However, low participation in the program has led to the use of other disaster assistance programs by the government, most notably disaster payments. Budgetary pressures may force the government to eliminate either crop insurance or disaster payments because their duplicate payments result in higher government costs. The objective of this study is to determine whether the social costs of disaster assistance can be reduced by improving disaster assistance programs. Social costs are defined here as the cost to the government of disaster payments and insurance subsidies and the cost to farmers of farm yield loses not covered by insurance or disaster payments. It is hypothesized that the performance of crop insurance could be improved by changes in contract design and using improved information on farmers' yield risk. The changes in contract design considered here include both county loss insurance and farm yield insurance with higher yield coverage and coinsurance to reduce moral hazard. The programs evaluated here are individual disaster payments, county disaster payments, county-triggered individual disaster payments, farm yield insurance, and county loss insurance. The analysis was carried out by determining the demand for alternative types of insurance for Tippecanoe County farmers using discrete choice models and then estimating the social costs associated with each type of disaster assistance program. Insurance premia and the costs of farm yield losses were calculated using yield distributions for four types of farms and for the county. These yield distributions recognize differences in both average yield and yield variability for farmers in this area. The results indicate that for corn in Tippecanoe County, farm yield insurance could achieve at least a 69 percent participation rate by using contracts with higher yield coverage, by assigning premia according not both average yield and yield variability, and by using premia from the yield distributions described above. Farm yield insurance in this case has a lower social cost than individual disaster payments. County disaster payments and county-triggered individual disaster payments are less expensive for the government than individual disaster payments, but they leave a high proportion of farm yield losses uncovered. Farmers disliked county loss insurance because they preferred insurance coverage on their own yields instead of county yields. The principles of contract design and improved information used in this study could be generally applied to different geographic areas to increase demand for farm yield insurance and reduce government subsidy costs by improving risk classification of farmers who use insurance.
Degree
Ph.D.
Advisors
Loehman, Purdue University.
Subject Area
Agricultural economics
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