An Empirical Analysis of U.S. Participation in Crop Insurance

Abstract

While the economic analysis of agricultural crop insurance has attracted increasing attention in the United States over the last decade, most of the work has been theoretical or hypothetical. For example, a number of papers focus conceptually on the problem of why private all-risk crop insurance markets do not emerge (for example, Nelson and Loehman 1987). Several papers investigate the potential explanation associated with adverse selection (Ahsan, Ali, and Kurian 1982; King and Oamek 1983; Skees and Reed 1986), moral hazard (Chambers 1989), and pooling inabilities (Quiggin 1990). Other papers suggest insurance schemes which eliminate or reduce moral hazard by basing indemnities on area yields or weather, limiting them to costs of production, or limiting them according to previous years’ claims (Halcrow 1949, Miranda 1990, Lee 1953, Quiggin 1986, Zulauf and Hedges 1988, Lambert 1983, Rogerson 1985). However, very few studies have attempted to examine and explain the low participation levels of U.S. farmers in federal crop insurance schemes that are underwritten by the federal government. Seemingly, the standard problems of moral hazard and adverse selection should only tend to induce insurance participation by those more likely to benefit from insurance. Whether this is actually the case is discussed below.