Moral hazard and adverse selection effects of cost-of-production crop insurance: evidence from the Philippines

Juan He, Xiaoyong Zheng, Roderick M. Rejesus and Jose M. Yorobe

Australian Journal of Agricultural and Resource Economics, 2019, vol. 63, issue 01

Abstract: This article examines the moral hazard and adverse selection effects of cost-ofproduction (COP) crop insurance products. Building on existing crop insurance models of moral hazard, as well as a survey-based data set that allows us to separately identify moral hazard from adverse selection, we find evidence that farmers insured under COP contracts spend more on chemical fertilizers and pesticides (i.e. those inputs whose costs determine the indemnity payments). However, since these same COP insured farmers are still likely to use less inputs (like effort) whose costs do not enter the indemnity payment formula, and yield depends on both types of inputs (i.e. the determinants and non-determinants of the indemnity payments), the final moral hazard effect of COP insurance on yields is ambiguous. Our analysis also suggests that farmers who tend to spend less on chemical fertilizers and pesticides are the ones with private information on soil conditions and pest incidence. These are the types of farmers who adversely select into COP contracts that only cover weather related losses.

Keywords: Risk; and; Uncertainty (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://ageconsearch.umn.edu/record/333760/files/ajar12290.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:aareaj:333760

DOI: 10.22004/ag.econ.333760

Access Statistics for this article

More articles in Australian Journal of Agricultural and Resource Economics from Australian Agricultural and Resource Economics Society Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().