Effects of Insurance Adoption and Risk Aversion on Agricultural Production and Technical Efficiency: A Panel Analysis for Italian Grape Growers

Simone Russo,Francesco Caracciolo,Cristina Salvioni

doi:10.3390/economies10010020

Abstract

This article aims to evaluate the effect of insurance on production, technical efficiency, and input use of Italian specialised-quality grape growers. A panel instrumental variable stochastic frontier approach is applied over the years 2008–2017 using data from the Farm Accountancy Data Network. The results show the requirement to correct for the endogeneity that stems from insurance adoption. Insurance has an enhancing effect on production and efficiency and reduces the use of intermediate inputs. It suggests that insurance helps to diminish the risk-averse farmers’ suboptimal input use due to the presence of uncertainty. Crop insurance leads risk-averse farmers to behave as if they were risk neutral and employs the profit-maximising input vector. Therefore, by reducing the risks linked to the uncertainty of outcomes, crop insurance leads grape growers to go in the direction of profit maximisation.

Highlights

Agricultural production has always had to cope with uncertainty (Moschini and Hennessy 2001)
Trede 1977; McConnell and Dillon 1997). These management approaches and practices include, among others: on- and off-farm diversification of income-generating activities (Chavas and Kim 2010; Corsi and Salvioni 2012; Bellon et al 2020), inputs intensification (Foudi and Erdlenbruch 2012; Pagnani et al 2021), varietal diversification (Di Falco and Chavas 2006; Gotor et al 2021), vertical integration and contract farming (Hennessy 1996; Otsuka et al 2016), forward contracting and futures hedging (Asplund et al 1989), and crop insurance (Ahsan et al 1982; Nelson and Loehman 1987; Ramaswami 1993). We focus on the latter, since crop insurance has recently been gaining the attention of policymakers, especially in the European Union with the recent development of the Common Agricultural Policy (CAP) (Enjolras et al 2012; Santeramo et al 2016; Vigani and Kathage 2019)
Similar to Roll (2019), we explore the effect of expenditure in crop insurance on the production and technical efficiency of a nationally representative sample of Italian grape growers

Summary

Introduction

Agricultural production has always had to cope with uncertainty (Moschini and Hennessy 2001). It is expected that the exposure to risk in agriculture is likely to increase due to upcoming challenges related to land degradation and climate change (IPCC 2013; Raimondo et al 2021). Such a situation explains the wide array of farming practices and management approaches available to the farmers to manage their risks at the farm level, basically involving three broad areas of farming decisions: production, marketing, and financial Crop insurance might cover different sources of uncertainty, supporting farmers in the process of adaptation to climate challenges (Di Falco et al 2014)

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Results

Discussion

Conclusion