Asymmetric Information and Profit Taking in Crop Insurance

Abstract

Excess returns to producers insured by the Federal Crop Insurance Corporation can arise due to asymmetric information or from the design of the insurance programs themselves. Using unique, unit‐level crop insurance contract data for major crops such as corn, soybeans, and wheat in five growing regions, we find evidence that producers in most regions may profit by selecting optional units, buy‐up coverage, or by using transitional yields to participate in the federal crop insurance program. We also find evidence that advantages increase with land resource heterogeneity. However, the results do not support hypotheses that producers profit by selecting revenue insurance, nor that high levels of government “incompetence” exist in the design and administration of the crop insurance system.