On the role of probability weighting on WTP for crop insurance with and without yield skewness

Douadia Bougherara and Laurent Piet ()

No 18-08, Working Papers SMART from INRAE UMR SMART

Abstract: A growing number of studies in finance and economics seek to explain insurance choices us- ing the assumptions advanced by behavioral economics. One recent example in agricultural economics is the use of cumulative prospect theory (CPT) to explain farmer choices regarding crop insurance coverage levels (Babcock, 2015). We build upon this framework by deriving willingness to pay (WTP) for insurance programs under alternative assumptions, thus extend- ing the model to incorporate farmer decisions regarding whether or not to purchase insurance. Our contribution is twofold. First, we study the sensitivity of farmer WTP for crop insurance to the inclusion of CPT parameters. We find that loss aversion and probability distortion in- crease WTP for insurance while risk aversion decreases it. Probability distortion in losses plays a particularly important role. Second, we study the impact of yield distribution skewness on farmer WTP assuming CPT preferences. We find that WTP decreases when the distribution of yields moves from negatively- to positively-skewed and that the combined effect of proba- bility weighting in losses and skewness has a large negative impact on farmer WTP for crop insurance.

Keywords: crop insurance; cumulative prospect theory; premium subsidy; Skewnes (search for similar items in EconPapers)
JEL-codes: D81 Q10 Q12 Q18 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2018
New Economics Papers: this item is included in nep-agr, nep-ias and nep-upt
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Citations: View citations in EconPapers (4)

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https://ageconsearch.umn.edu/record/279351 (application/pdf)

Related works:
Working Paper: On the role of probability weighting on WTP for crop insurance with and without yield skewness (2018)
Working Paper: On the role of probability weighting on WTP for crop insurance with and without yield skewness (2018)
Working Paper: On the role of probability weighting on WTP for crop insurance with and without yield skewness (2018)
Working Paper: On the role of probability weighting on WTP for crop insurance with and without yield skewness (2018)
Working Paper: On the role of probability weighting on WTP for crop insurance with and without yield skewness (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:rae:wpaper:201808

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