Comparing Producer Welfare Effects of Revenue Insurance and Yield Insurance

Abstract

The purpose of this study is to investigate the welfare changes of farm producers insured in either yield or revenue insurance. Monte-Carlo simulations are used to determine the changes of certainty equivalent of each insurance contract. The results indicate that, if the coefficient of variation(c.v.) of prices is higher than that of yields, revenue insurance generates greater welfare than yield insurance. The higher the c.v. of prices is, the greater the welfare increase of revenue insurance is. Even in case the c.v. of yields is higher than that of prices, revenue insurance generates greater welfare if the correlation between yields and prices is weak. In case the c.v. of yields is much higher than the c.v. of prices and the correlation between yields and prices is very strong, yield insurance generates greater welfare than revenue insurance. It appears that current revenue insurance programs for four crops(soybean, garlic, onion, grape) successfully achieve the policy goal of increasing producer welfare.