Moral hazard and adverse selection effects of cost‐of‐production crop insurance: evidence from the Philippines

This article examines the moral hazard and adverse selection effects of cost‐of‐production (COP) crop insurance products. Building on existing crop insurance models of moral hazard, as well as a survey‐based data set that allows us to separately identify moral hazard from adverse selection, we find evidence that farmers insured under COP contracts spend more on chemical fertilizers and pesticides (i.e. those inputs whose costs determine the indemnity payments). However, since these same COP insured farmers are still likely to use less inputs (like effort) whose costs do not enter the indemnity payment formula, and yield depends on both types of inputs (i.e. the determinants and non‐determinants of the indemnity payments), the final moral hazard effect of COP insurance on yields is ambiguous. Our analysis also suggests that farmers who tend to spend less on chemical fertilizers and pesticides are the ones with private information on soil conditions and pest incidence. These are the types of farmers who adversely select into COP contracts that only cover weather related losses.     

How crop insurance influences agrochemical input use: Evidence from cotton farmers in China

Crop insurance is critical in risk management in global agricultural production (e.g. by helping stabilise farmers' incomes in the long term and reducing risk-bearing costs). In this paper, using field survey data on cotton farmers in Xinjiang, China, we examine the influence of crop insurance on farmers' behaviours regarding agrochemical inputs and aim to investigate the synergy between crop insurance and reductions in fertiliser and pesticide usage. We find evidence that crop insurance significantly negatively affects farmers' use of fertilisers and pesticides, as well as significantly positively affects their adoption of green agricultural technologies (GAT) that can replace or complement traditional fertilisers and pesticides. Moreover, our results reveal that compared with small-scale farmers, crop insurance has a stronger effect on large-scale farmers' use of agrochemicals. Finally, when the insured amount is higher or the relative deductible is lower, farmers are more likely to reduce fertiliser and pesticide usage and adopt GAT. Overall, this paper scientifically identifies crop insurance can improve farmers' agrochemical input behaviour, by reducing farmers' use of traditional agrochemical inputs and increasing their adoption of GAT, which is of great significance for ensuring the safety of the agricultural ecological environment.     

Productivity,credit, risk,and the demand for weather index insurance in smallholder agriculture in Ethiopia

The article explores the relationship between fertilizer use and the demand for weather index insurance (WII) among smallholder farmers in Ethiopia. We examine whether fertilizer use is profitable under current smallholder production conditions, whether risk‐related factors affect fertilizer use, and we estimate the returns to inputs in the agricultural production function in the absence of insurance. We then study how these primitives of agricultural production functions relate to insurance demand. The study compares a survey‐based estimate of willingness to pay with actual uptake for the weather insurance, finding the stated and actual demand to be almost completely uncorrelated. While those with high marginal returns to inputs say they would purchase insurance, only those with low marginal returns actually do, consistent with the stated purpose of the product as input insurance. Insurance demand proves to be highly responsive to the existence and amount of randomly allocated insurance vouchers.     

Assessing effects of federal crop insurance supply on acreage and yield of specialty crops

Crop insurance may affect harvested acreage and yield by influencing producers’ behavior such as land allocation and input use. Although specialty crops are a major source of farm income, especially on the U.S. west coast, they have not received as much attention as field crops in previous empirical studies. This paper assesses the effect of moral hazard and adverse selection associated with the federal crop insurance program (FCIP) on the acreage and yield of major specialty crops in California. An econometric method that expands the switching regression model is developed to assess the effect. Results suggest that federal crop insurance can change specialty crop growers’ production responses to climate and soil conditions. The moral hazard effect tends to increase the acreage and yield of the specialty crops, whereas the adverse selection effect tends to have the opposite effect. The overall effect of the FCIP on acreage and yield of specialty crops is found to be moderate.     

Moral hazard: the effect of insurance on risk and efficiency

While there is a large body of literature investigating the effect of crop and livestock insurance on input and yield, limited attention has been paid to the effect of insurance on efficiency. This article investigates how insurance affects technical efficiency and whether insurance alters the utilized input quantity to a riskier bundle using the Norwegian salmon farming industry as a case. The results illustrate that insurance has an enhancing effect on production and efficiency and changes the utilized input mix—a well‐insured farmer uses more feed and less capital and labor than a less‐insured farmer. When linking this to each input's risk profile, the results indicate that insurance will induce the use of the risk‐increasing factor (feed) and reduce the use of the risk‐decreasing factors (labor and capital)—thereby increasing production risk and indicating moral hazard.     

优化中山政策性农业保险体系的研究——基于道德风险视角的思考

道德风险对政策性农业保险体系的稳定至关重要,农业互助保险能较好地控制道德风险,有助于政策性农业保险体系的可持续发展。近年来,中山市积极开展了政策性农业保险的试点,稳定了农产品价格,帮助农户科学管理农业生产风险,促进农民收入稳步增长,推动了中山农业产业化的发展。为有效控制道德风险,中山市政策性农业保险开始探索向农业互助保险模式转型,尝试独具特色的互助政策性农业保险体系,但是还需要在法律环境、制度构建、风险控制和产品设计等方面进行农业互助保险体系的优化。本文结合国内外经验,提出了优化中山政策性农业保险体系的对策建议。     

Interaction between crop insurance and technology adoption decisions: The case of wheat farmers in Chile

This paper examines relationships between crop insurance and input technology decisions among Chilean wheat farmers. Using nationwide farm‐level data, a bivariate probit model is estimated. We investigate the extent to which the adoption of production input technologies is associated with farmers’ participation in the insurance program. We find that relationships between insurance and technology decisions are significant only for family farmers. In particular, there is a negative relationship between participation in the insurance program and the adoption of modern irrigation. Interpretations based on the role of input technologies on insurance adoption and adverse selection behaviours are discussed.     

The impacts of multiperil crop insurance on Indonesian rice farmers and production

This article analyzes the effect of multiperil crop insurance policy for risk‐averse Indonesian rice farmers located in Tuban and Gresik Regencies of the East Java Province. Based on the model, comparative static analysis of a change in policy variables (coverage levels and premium subsidies) on input use through the coupling, wealth, and insurance effects are presented. The comparative static results are largely ambiguous and left as empirical questions. Consequently, the model is numerically simulated to quantify the effects of different coverage levels and subsidy rates on input use, expected net insurance payments, and certainty equivalents. The empirical analysis shows that MPCI crop insurance results in a decline in expected yield for coverage levels above about 82.5% for both regencies. Furthermore, higher subsidy rates amplify the reduction in input use and yield. Therefore, incomplete coverage with relatively low premium subsidies is the best policy to minimize the impact on input use and yield. However, from the farmers’ perspective, the optimal policy combination results from the highest coverage level and subsidy, which offer the largest expected net insurance payments and certainty equivalent.     

MALLEE WHEAT FARMERS' DEMAND FOR CROP AND RAINFALL INSURANCE

Producers' demand for a crop insurance program with indemnities based on their actual yields and a rainfall insurance program with indemnities based on area rainfall is analysed. Actuarial costs of these hypothetical programs are estimated. Tobit procedures are used to analyse factors influencing the amount which farmers would be willing to pay for the alternative insurance programs. Factors related to the absolute size of risk and capacity to bear risk, as well as personal characteristics and risk attitudes of producers, have effects on the demand for insurance as hypothesised. Problems of adverse selection are associated with the area yield-based program, while both crop and rainfall insurance programs may involve some moral hazard. Producer participation in either program would be limited.     

The impact of the 1999 CAP reforms on the efficiency of the COP sector in Spain

The cereal, oilseeds, and protein crop sector (COP) occupies a prominent position within the European Union's agricultural sector. Within Spain, the COP sector accounts for almost a third of total Agricultural Guidance and Guarantee Fund expenses, and half of the utilized agricultural area (UAA). The COP sector is not only relevant because of its physical and economic magnitude, but also because of the political attention it receives. The Common Agricultural Policy (CAP) reforms that occurred during the 1990s paid special attention to this sector. This article aims to determine the impacts of Agenda 2000 on a sample of Spanish COP farmers' production decisions by using an output-oriented stochastic distance function. The distance function allows for an assessment of the reform-motivated changes on total output, input used, input composition, and crop mix. It also permits an assessment of the impacts of the reform on farms' technical efficiency.
Results show that the reform has shifted the production frontier inward and changed output composition in favor of voluntary set-aside land. With respect to input composition, Agenda 2000 induced a decrease in land, fertilizers, pesticides, and other inputs in favor of labor. In addition, Agenda 2000 has had a negative impact on technical efficiency.     

Developing Experience-Based Premium Rate Discounts in Crop Insurance

This article addresses the feasibility of implementing an experience-based premium rate discount system in crop insurance. While adverse selection and moral hazard in crop insurance have been extensively studied in the past, discount systems or bonus–malus incentives have not, to our knowledge, been investigated. Our empirical analysis indicates that a crop insurance discount system could be implemented based on a measure of favorable past insurance experience. The estimated average discounts based on the rating methods developed in this study ranged from 5% to 9% (depending on the crop being considered).     

Moral hazard and subsidized crop insurance

Along with adverse selection, moral hazard is one of the major hurdles that private and public insurance plans must contend with. Moral hazard occurs if risks are endogenous to a producer's behavior and if the insurer is unable to properly monitor the insured. We review the role of moral hazard in the US crop insurance program. We conduct an empirical analysis of one important aspect of the US crop insurance program—prevented planting. This provision provides indemnity payments if conditions are not suitable for planting. The program has been the subject of considerable controversy, especially during 2019, when the rate of claims is expected to be especially high. Because loss adjustors may encounter difficulties in assessing the weather conditions associated with prevented planting claims, the program is susceptible to moral hazard. We consider the extent to which prevented planting claims may be endogenous to prices. We find significant evidence of moral hazard. The likelihood of prevented planting claims increases as the expected market price decreases or as fertilizer costs increase for corn and soybeans in the Prairie Pothole Region and for grain sorghum and cotton in all states.     

Crop Insurance in a Political Economy: An Alternative Perspective on Agricultural Policy

Lawmakers often subsidize farmers in times of financial distress. This article models this political impulse as a constraint on government farm policy, describing how ex ante government farm insurance can deter ex post "disaster relief" and improve production incentives by countering the moral hazard that otherwise prevails. Absent ex ante government policy, ex post relief takes the form of revenue insurance, which prompts excessive entry into farm production and under-production by operating farmers. Ex ante government policy can raise economic and political welfare by buying out low productivity farmers and offering profitable farmers a combination of revenue insurance, price supports, and a program participation fee.     

Farmer Participation,Entry and Exit Decisions in the Italian Crop Insurance Programme

The factors affecting the demand for agricultural insurance in the USA have been extensively studied over the last two decades. However, the determinants of a farm's entry and exit decisions in the insurance market have received relatively little attention. Turnover in the insurance book of business is an important issue in most private and public crop insurance plans. Moreover, insurance markets in the EU are still largely under‐investigated. We investigate empirically the determinants of crop insurance participation in Italy. We show that the participation rate is high for large firms and that it is negatively correlated with crop diversification, which is itself a form of insurance. High premiums tend to inhibit both entry and exit from the insurance market. Larger and wealthier farms are more likely to adopt insurance and renew coverage over time. We discuss implications of our results for public intervention and the private industry. In particular, we demonstrate that the decision to drop coverage by an insured grower may differ significantly from the corresponding decision to enroll in an insurance programme by an uninsured farmer. To the extent that policymakers want to encourage participation in subsidized crop insurance programmes, education and outreach efforts toward uninsured farmers may differ substantially from those directed toward keeping insured farmers enrolled in the programme. We investigate these differences.     

Why Do Some Bt-Cotton Farmers in China Continue to Use High Levels of Pesticides?

China was the first developing country to introduce Bt cotton on a large scale. This paper provides an indepth economic analysis of Bt cotton production by small-scale farmers in China. Data were collected in 2002 in Linqing County, in Shandong Province and comprised a season-long cotton production monitoring with 150 farmers and complementary household interviews. For quality assessment, the Bt toxin concentration of the various Bt varieties used by the farmers was determined for each plot. All farmers were growing insect resistant Bt cotton varieties. Yet, they sprayed high amounts of chemical insecticides, out of which 40% were extremely or highly hazardous. The paper reviews methodological issues inherent to impact assessment of crop biotechnology and identifies market and institutional failure as possible reasons for continued high pesticide use. Using the damage function methodology the coefficients for both damage control inputs, i.e., Bt varieties (measured as toxin concentration), and insecticide quantity were not significantly different from zero. Results show that absence of enabling institutions and lack of farmer knowledge can considerably limit the benefits of Bt cotton for small-scale farmers. The paper points out the importance to include the institutional conditions in the evaluation of agricultural biotechnology in developing countries.     

Motivations to grow energy crops: the role of crop and contract attributes

Perennial energy crops are a promising source of bioenergy whose production involves production risks, long‐term commitment of land and need for crop‐specific investments without the coverage of crop insurance potentially available for conventional crops. We conduct a choice experiment in five states in the Midwestern and South‐central regions of the U.S. to examine the effect of crop‐contract attributes on the joint discrete‐continuous choice decisions to adopt an energy crop and convert acres to it from a status quo use, while controlling for the effect of various farmers’ risk and time preferences, sociodemographic characteristics, and availability of crop insurance for conventional crops. We find robust evidence that high discount rates, high upfront establishment costs and need for crop‐specific investments create disincentives for adoption and allocation of land to energy crop production. The effects of riskiness of returns and risk aversion are less robust across specifications. The effect of conventional crop insurance on the energy crop adoption decision differs across types of insurance; in particular, farmers with revenue insurance are statistically significantly less likely to adopt an energy crop. Our results have implications for the design of effective contracts and policy incentives to induce the production of energy crops.     

互联网嵌入对农户化学农药减量使用的影响——基于PSM模型的计量分析

[目的]在数字农业和绿色农业的双重背景下,探讨互联网嵌入对农户化学农药减量使用的影响,有助于实现农业数字化和绿色化发展。[方法]文章基于四川省712份微观农户调研数据,采用倾向得分匹配法实证检验了互联网嵌入是否会减少农户化学农药使用,并分析了其影响效应在不同农户群体中的异质性。[结果]互联网嵌入对农户减少化学农药使用具有显著的正向影响,其平均处理效应为0.114;互联网嵌入能有效促进小农户、专业种植大户和家庭农场减少化学农药使用,平均处理效应分别介于0.104～0.113、0.078～0.103和0.116～0.128;互联网嵌入对家庭农场减少化学农药使用的促进作用略大于小农户和专业种植大户,而相比于专业种植大户,互联网嵌入对小农户化学农药减量使用的促进作用更强。[结论]应推进农村新基建发展,提升农村互联网普及率,采取差异化的措施,鼓励家庭农场发展,引导家庭农场将互联网技术应用于农业生产,并加强互联网技术宣传与培训,提升小农户和专业种植大户嵌入互联网的能力,以促进农户减少化学农药使用。     

Farmers’ risk preferences and pesticide use decisions: evidence from field experiments in China

China faces health and environmental problems associated with the use of agricultural chemicals, including pesticides. While previous studies have found that risk aversion affects pesticide use in China, they have focused primarily on commercial cotton farmers. In this study, we consider the case of smaller, semisubsistence and subsistence farmers in a poor and landlocked province of China (Yunnan). We use a field experiment to measure risk aversion and collect detailed data on farm production and input use to specifically ask whether risk aversion affects pesticide use, and whether this effect differs for subsistence farmers producing exclusively for home consumption versus semisubsistence farmers who produce both for home and the market. We find that risk aversion significantly increases pesticide use, particularly for subsistence farmers and for market plots by semisubsistence farmers. Further, this effect of risk aversion significantly decreases with farm size for subsistence farmers, but not for semisubsistence farmers, implying that pesticide use may be used to ensure sufficient food supply for home consumption. Finally, we find barriers to the use of pesticides for subsistence farmers, both in terms of financial constraints and economies of scale. This finding implies that risk‐mitigation strategies, such as crop insurance, may not target food security concerns of subsistence farmers. Given these different motivations for pesticide use, policymakers may wish to consider effective tools to support rural food security for farmers in the poorer regions of China in order to decrease pesticide use.     

我国森林保险发展缓慢的深层次原因及对策分析

从经济学角度分析了我国森林保险发展缓慢的原因与森林保险发展过程中信息不对称问题,逆向选择和道德风险现象突出使得保险公司保险产品供给不足,林农投保需求减少,投保积极性不高,导致森林保险发展缓慢。通过对森林保险中的主体行为博弈分析,指出建立以政府为主导的政策性森林保险,更适合当前林业发展的需要,并给出相应的对策。     

Damage Control Productivity: An Input Damage Abatement Approach

This paper compares the value of the marginal product of three different pesticides from different specifications of the production function. The specifications are the output damage abatement specification proposed by Lichtenberg and Zilberman, a general input damage abatement specification and a traditional production function. These specifications are estimated on panel data of specialised Dutch arable farms over the period 1989–1992, using Generalised Maximum Entropy estimation. Results of the input damage abatement specification show that pesticides have different impacts on individual productive inputs, although statistical evidence is weak. The output damage abatement specification produces statistically more significant relations, but imposes restrictions that are only partly supported by the data. It is also found that estimation of a quadratic traditional production function, that treats damage abatement inputs in the same way as productive inputs, does not lead to over estimation of the value of the marginal product as previous authors have hypothesised.