COSTLY YIELD VERIFICATION, MORAL HAZARD, AND CROP INSURANCE CONTRACT FORM

Charles E. Hyde and James A. Vercammen

Journal of Agricultural Economics, 1997, vol. 48, issue 1‐3, 393-407

Abstract: The theories of hidden‐action, both moral hazard and costly state verification, are drawn on to analyse crop insurance contract structure. The hidden‐action moral hazard model allows few clear predictions regarding optimal contract form. In particular, the conditions under which actual contracts are optimal are not clear. Posing crop insurance as a problem of costly yield verification, however, results in optimal contracts with familiar properties ‐ a deductible indemnification if and only if yield is verified, and indemnification only when yield is low. However, these contracts require full insurance across low yield states, while actual contracts typically involve co‐insurance. This model is then generalised to incorporate hidden‐action moral hazard, and it is shown that optimal contracts then require co‐insurance. Thus, this model reflects the essential features of actual contracts, suggesting that recognising the incentives for misreporting and for insurers to economise on yield verification costs will potentially result in a better understanding of crop insurance.

Date: 1997
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://doi.org/10.1111/j.1477-9552.1997.tb01161.x

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:bla:jageco:v:48:y:1997:i:1-3:p:393-407

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0021-857X

Access Statistics for this article

Journal of Agricultural Economics is currently edited by David Harvey

More articles in Journal of Agricultural Economics from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().