Moral Hazard in Agricultural Yield Insurance

Authors

  • Boyingzi Luo Central University of Finance and Economics

DOI:

https://doi.org/10.14738/abr.81.7753

Keywords:

Moral hazard, Agricultural yield insurance, Miranda Decomposition.

Abstract

In agricultural yield insurance practices, there are two main categories of insurance products which differed from the targeted insured yield, namely area-yield based insurance and individual-based insurance. A common knowledge is that individual-yield based insurance has more flexibility that could meet the real demand of insureds, while having much more severity of moral hazard and higher administration costs. Relatively, area-yield based insurance has lower risk of moral hazard, but obtaining bias, or so-called basis risk at the same time. In this paper, we use an improved modified Miranda Decomposition Model to establish a theoretical framework of farmers behaviors when assuming their goals are to maximize the expected rate of return in agricultural production process under both individual-yield and area-yield insurance. The results show that these two distinct arrangements may cause different motivation to farmers, seducing them act or not act in moral hazard manner.

References

[1]. Chambers, Robert G. ”Insurability and Moral Hazard in Agricultural Insurance Markets.” Amer. Agr. Econ. 71(1989):604-16.

[2]. Barnett, B. J., J. R. Black, Y. Hu, and J. R. Skees. Is Area Yield Insurance Competitive with Farm
Yield Insurance? Journal of Agricultural and Resource Economics. 30(2005):285-301.

[3]. Bulut, H., K. J. Collins, and T. P. Zacharias. Optimal Coverage Level Choice with Individual and
Area Insurance Plans. American Journal of Agricultural Economics. 94(2012):1013-1023

[4]. Miranda, M. J. Area-Yield Crop Insurance Reconsidered. American Journal of Agricultural Eco
nomics 73(1991):233-242

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Published

2020-01-28

How to Cite

Luo, B. (2020). Moral Hazard in Agricultural Yield Insurance . Archives of Business Research, 8(1), 163–171. https://doi.org/10.14738/abr.81.7753