Marketing Contracts and Crop Insurance

11 Pages Posted: 15 Apr 2020

See all articles by Xiaoxue Du

Xiaoxue Du

University of California, Berkeley

Jennifer Ifft

Cornell University - Dyson School of Applied Economics and Management

Liang Lu

University of California, Berkeley

David Zilberman

University of California, Berkeley - Department of Agricultural & Resource Economics

Date Written: October 2015

Abstract

Contracts between farmers and intermediaries and crop insurers are important means for farmers to mitigate risks in modern U.S. agriculture. In this paper, we investigate the effect of crop insurance enrollment on contract terms and farmers’ participation in marketing contracts. Following Ligon (2003), we set up a mechanism design framework to demonstrate an intermediary's contract design problem, where farmers are assumed to be utility maximizing agents. We depict farmers’ optimal choices of insurance coverage using the specification developed by Babcock (2012). Our model shows that improved terms of crop insurance (lower premiums, higher subsidies) make contracts less appealing to farmers as mechanisms for mitigating risk. Therefore, intermediaries may revise their contract offers so that they are more attractive. However, improvements in contract terms are limited by their cost to the intermediaries and will not lead to expanded participation in contracts.

Keywords: Marketing contract, crop insurance, mechanism design

Suggested Citation

Du, Xiaoxue and Ifft, Jennifer and Lu, Liang and Zilberman, David, Marketing Contracts and Crop Insurance (October 2015). American Journal of Agricultural Economics, Vol. 97, Issue 5, pp. 1360-1370, 2015, Available at SSRN: https://ssrn.com/abstract=3574929 or http://dx.doi.org/10.1093/ajae/aav024

Xiaoxue Du (Contact Author)

University of California, Berkeley

310 Barrows Hall
Berkeley, CA 94720
United States

Jennifer Ifft

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

Liang Lu

University of California, Berkeley

310 Barrows Hall
Berkeley, CA 94720
United States

David Zilberman

University of California, Berkeley - Department of Agricultural & Resource Economics ( email )

Berkeley, CA 94720
United States

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