Moral Hazard and Adverse Selection Effects of Cost‐of‐Production Crop Insurance: Evidence from the Philippines

32 Pages Posted: 24 Jan 2019

See all articles by Juan He

Juan He

Huazhong Agricultural University

Xiaoyong Zheng

North Carolina State University

Roderick M. Rejesus

North Carolina State University

Jose M. Yorobe Jr.

University of the Philippines, Los Baños

Date Written: January 2019

Abstract

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.

Keywords: adverse selection, crop insurance, moral hazard

Suggested Citation

He, Juan and Zheng, Xiaoyong and Rejesus, Roderick M. and Yorobe Jr., Jose M., Moral Hazard and Adverse Selection Effects of Cost‐of‐Production Crop Insurance: Evidence from the Philippines (January 2019). Australian Journal of Agricultural and Resource Economics, Vol. 63, Issue 1, pp. 166-197, 2019, Available at SSRN: https://ssrn.com/abstract=3318476 or http://dx.doi.org/10.1111/1467-8489.12290

Juan He (Contact Author)

Huazhong Agricultural University

Wuhan, Hubei
Wuhan, Hubei 430070
China

Xiaoyong Zheng

North Carolina State University ( email )

Box 8109
3332 Nelson Hall
Raleigh, NC 27695-8109
United States
919-515-4543 (Phone)
919-515-6268 (Fax)

HOME PAGE: http://www4.ncsu.edu/~xzheng

Roderick M. Rejesus

North Carolina State University ( email )

Hillsborough Street
Raleigh, NC 27695
United States

Jose M. Yorobe Jr.

University of the Philippines, Los Baños

Pedro R. Sandoval Ave
Los Banos, Laguna 4031
Philippines

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