Risk aversion in crop insurance program purchase decisions

Kaiyu Lyu and Thomas J. Barré

China Agricultural Economic Review, 2017, vol. 9, issue 1, 62-80

Abstract: Purpose - The purpose of this paper is to contribute to the aforementioned literature on the linkage between economic activity and human preference by estimating the cross-sectional determinants of farmers’ participation in participation in crop insurance programs (CIPs) and identifying the impediments preventing the remaining farmers from participating. Design/methodology/approach - Using the unique data sets of risk preference experiments and maize producer surveys pertaining to the maize production areas of China, this paper explores the determinants of farmers’ CIPs and scrutinizes the role of risk aversion in farmers’ CIP purchase decisions under the expected utility maximization framework. And a “non-zero threshold probit model” is used for the analysis. Findings - The results show that risk aversion plays an important role in CIP purchase decision-making, not only in the form of its direct effect but also with regard to the interaction term and expected loss. Furthermore, if the insured amount is high enough, then risk aversion will no longer affect insurance purchase. Additionally, purchase experience, CIP environment (village purchase ratio), and contract items (insured amounts) are significant determinates in these decisions. There is no significant evidence to suggest that serious adverse selection exists in the sampling areas. Originality/value - One theoretical model is established which considered not only general variables like farmers’ production and household information, but also conditions and terms in the insurance policies. The unique experimental method is used to measure farmers’ risk aversion. Both the role of risk aversion and its’ interaction terms with others in CIP participation are scrutinized to identify complicated influences under the context of real society.

Keywords: China; Purchase decision; Willingness to pay; Crop insurance programmes; Maize producer (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:caerpp:caer-04-2015-0036

DOI: 10.1108/CAER-04-2015-0036

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