Abstract
The contemporary agriculture is among the most risky economic activities. In addition to the previously known production, price and market risk, and later also the financial risk, today agricultural producers are increasingly more often confronted with institutional risk and personnel management risk and risk related to climate change. On the other hand, farmers have at their disposal numerous tools and strategies to counteract threats and mitigate their negative effects. Among these risk management instruments and strategies, traditional/ conventional insurance of crops, livestock and tangible assets is still important. In this context, the basic goal of the article is to generalise the theoretical foundations of the above-mentioned insurance, but limited to their historically oldest approach; hence on the basis of neoclassical microeconomics and classical decision theory. According to the convention existing, the essence of the theory/hypothesis of the expected utility of von Neumann–Morgenstern is first analysed. In the last part of the article, the assumptions of the expected utility theory are concretised on the example of agricultural insurance.
Highlights
Agricultural activity, at the very least due to its nature- and biology-related character, has always been one of the riskiest
The risk premium, as the measure of the maximum willingness to pay for certainty will be: ρ siblweρhine=rtee12r:pσrex2t⋅raeRtpiAorneswenhtesrtehtehvearriisaknlceevoelf wealth
In the case of indifference to risk, the certainty equivalent is equal to the expected value, so the risk premium is absent in this case
Summary
Agricultural activity, at the very least due to its nature- and biology-related character, has always been one of the riskiest. Where: xi – possible lottery outcome from set L, u(xi) – a real number assigned to outcome xi It follows from the above general notation of the VNM function that the agent should prefer growth in the expected utility, so it will be an agent maximising the expected utility. In response to the formal criticism of the EU and the impractical nature of the key axioms of the VNM function, the subjective expected utility (SEU) theory was formulated This theory should be associated with the name of an Italian probabilist and actuary, de Finetti, who in 1937 explicated the essence of subjective probability, i.e. probability determined by the deciding agent itself and not necessarily through reference to rigorous probability theory, but through past events and personal experience. What indubitably deserves attention is the fact that the standard model combines microeconomic theory with theory of decision under risk and uncertainty
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