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Three Essays on Risk Preferences and Farm-Decision Making in the United States

Sankalp Sharma, University of Nebraska - Lincoln

Abstract

Crop insurance is a frequent topic of debate among policymakers. This dissertation answers questions relevant to the current discussion about the cost of insurance, participation in the insurance program and the relationship between farm characteristics and crop insurance returns. ^ Determining whether crop insurance premiums are actuarially fair has become a relevant policy debate in the past decade. In chapter we determine the risk premium or the willingness-to-pay for crop insurance from the producer’s side using a new structural model, which jointly incorporates price and yield risk. We also determine producer risk preferences and production elasticities to obtain the willingness to pay measures. We test our model on producers in Nebraska, Iowa and South Dakota. Our results find evidence of risk aversion in all three states. However, the obtained risk premium measures are generally lower than the average premium amounts in each of the three states, suggesting that producers perhaps desire even more subsidy. ^ In the second chapter, we determine the risk preferences of crop producers using the safety-first method. Our methodology is unique, since it utilizes both price and yield risk in the producer’s optimization problem. We then compare the derived preferences with the stated preferences of the producers. The stated preferences are obtained from a lottery-style game designed to elicit producers’ risk preferences. The results indicate that there is in fact a relationship between the preferences derived from our structural model and the ones stated by the producers in the game. This is an important result from a policy-making perspective, as it validates the use of behavior elicitation surveys about risk preferences. ^ Finally, in the third chapter, we test whether crop insurance returns remains neutral to farm characterisitics and producer information. The Risk Management Agency’s rating determination methodology includes some characteristics for premium rating determination. However, we demonstrate that others such producer size and type, liability and the number of units a producer farms on also influence the crop insurance returns, thereby rendering the RMA methodology less efficient.^

Subject Area

Agricultural economics

Recommended Citation

Sharma, Sankalp, "Three Essays on Risk Preferences and Farm-Decision Making in the United States" (2016). ETD collection for University of Nebraska - Lincoln. AAI10247801.
http://digitalcommons.unl.edu/dissertations/AAI10247801

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