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On the Economics of Crop Insurance

Charalampos Mavroutsikos, University of Nebraska - Lincoln

Abstract

This dissertation develops a novel theoretical framework of heterogeneous producers to analyze the system-wide market and welfare effects of crop insurance and the determinants of the optimal policy design under alterative information structures and government policy objectives. The framework captures the empirically relevant differences in producer attitudes towards risk and their impact on crop insurance participation under different insurance contracts and premium subsidies. The explicit consideration of producer heterogeneity enables also the proper identification and disaggregation of the distributional impacts of crop insurance, and the evaluation of the role of multiple contracts and premium subsidies in policy design. Analytical results indicate that producer welfare gains from crop insurance increase with the level of producer risk aversion and insurance coverage. The provision of different crop insurance contracts results in a separating equilibrium, where different producer groups choose different contracts. The disaggregated welfare impacts of changes in contract availability are determined by the relative differences in premium rates and reduction in risk exposure among the insurance options. Changes in premium subsidies are shown to cause contract-specific participation and welfare changes, with asymmetric benefits for the different policy participants. Regarding the optimal policy design, the study identifies (a) the determinants of the optimal level of premium subsidies and (b) their role in coping with informational asymmetries, under different objectives and political preferences of the government. The analysis shows how premium subsidies can be utilized to induce producer behavior leading to a desired separating equilibrium and presents an alternative policy design that can more efficiently achieve the government objective of increased producer participation in crop insurance. Finally, by utilizing highly detailed crop insurance data, the study empirically tests and quantifies the system-wide effects of crop insurance, the impact of premium subsidies on participants’ welfare, and identifies crop and regional differences. Empirical results are consistent with/support the theoretical findings indicating that producer benefits from crop insurance increase with the level of producer risk aversion, high coverage and regional riskiness. The change in the magnitude of premium subsidies in 2000 resulted in increased producer welfare and spatial differences in private insurers’ returns.

Subject Area

Agricultural economics|Public policy

Recommended Citation

Mavroutsikos, Charalampos, "On the Economics of Crop Insurance" (2019). ETD collection for University of Nebraska - Lincoln. AAI27666922.
https://digitalcommons.unl.edu/dissertations/AAI27666922

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