A Natural Resource Theory of U.S. Crop Insurance Contract Choice

21 Pages Posted: 15 Apr 2020

See all articles by Xiaodong Du

Xiaodong Du

University of Wisconsin-Madison

David Hennessy

Iowa State University

Hongli Feng

Iowa State University - Center for Agriculture and Rural Development (CARD)

Date Written: January 2014

Abstract

A large variety of subsidized crop insurance products are available to U.S. crop growers. Distinct and perhaps puzzling patterns in the choices of insurance products and coverage levels can be discerned. Where production conditions are better and yields are less risky then (a) higher insurance coverage levels are chosen; and (b) revenue insurance is preferred over yield insurance. Also, (c) the extent of preference for revenue insurance is stronger in more productive areas. Assuming, as many do, that growers seek to maximize subsidy transfers, point (a) can be explained by the interaction between yield technology and natural resource endowments. Points (b) and (c) can be explained by location in conjunction with the “natural hedge” and a contract design bias in how revenue insurance guarantees are computed. Empirical study of Risk Management Agency data on corn, soybean, and wheat yields, and insurance contract choices lend support to our model inferences.

Keywords: agricultural policy, contract choice, crop insurance, land use, yield risk measurement

Suggested Citation

Du, Xiaodong and Hennessy, David and Feng, Hongli, A Natural Resource Theory of U.S. Crop Insurance Contract Choice (January 2014). American Journal of Agricultural Economics, Vol. 96, Issue 1, pp. 232-252, 2014, Available at SSRN: https://ssrn.com/abstract=3573675 or http://dx.doi.org/10.1093/ajae/aat057

Xiaodong Du (Contact Author)

University of Wisconsin-Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States
6082620699 (Phone)

David Hennessy

Iowa State University

Hongli Feng

Iowa State University - Center for Agriculture and Rural Development (CARD) ( email )

Ames, IA 50011
United States

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