Too Cold for Comfort: A Theoretical Analysis of Index-Based Insurance for Frost Damage to Crops

Amogh Prakasha Kumar, Laura Meriluoto and Richard Watt ()
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Richard Watt: University of Canterbury, https://www.canterbury.ac.nz

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: In this article we reconsider the economic theory of index insurance. In the previous literature on this topic, the only choice variable that the insurance demander was permitted to choose was the amount of the payment to be received should the index be verified. However, it is clear that the index itself is an integral element in the contract, and it is an element about which the insurance demander has clear preferences. We analyse the optimal demand for index insurance under the assumption that the demander can choose both the payment to be received when the index is verified, and the index value itself. We find that there is always an interior solution to this problem. We also consider the market equilibrium under a variety of settings in regards the position of the insurer. The article is cast within the scope of insurance for frost damage to a crop, but all of the results are directly applicable to any peril for which a publicly observable signal exists.

Keywords: Index insurance; crop insurance; agricultural economics (search for similar items in EconPapers)
JEL-codes: D8 G22 Q1 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2024-02-01
New Economics Papers: this item is included in nep-agr
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Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:24/02

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