Compulsory Versus Voluntary Insurance: An Online Experiment

Abstract

Agricultural insurance can be classified into two broad categories: Compulsory (government/public) and Voluntary (market/private) insurance. In practice, the vast majority of compulsory insurance is partially compulsory, where compulsory insurance provides only partial coverage, and it allows for supplemental voluntary purchases (mixed insurance). In this article, we use the Balloon Analogue Risk Task as the assessment of risk‐taking and insurance context to conduct an online experiment. The main objective is to compare compulsory, voluntary and mixed insurance in terms of adverse selection and moral hazard. We find adverse selection in purely voluntary insurance, but advantageous selection in mixed insurance. Moral hazard exists in all three types of insurance, but it is smaller in mixed insurance. Our ancillary results suggest that under the combined effects of significant moral hazard and “no adverse selection” in purely compulsory insurance make it the insurance type with the lowest social earnings. Overall there is no crowding‐out effect of the compulsory part on residual voluntary purchases in mixed insurance.