Adverse Selection in Crop Insurance: Actuarial and Asymmetric Information Incentives

Richard Just, Linda Calvin and John Quiggin

American Journal of Agricultural Economics, 1999, vol. 81, issue 4, 834-849

Abstract: Adverse selection is often blamed for crop insurance indemnities exceeding premiums plus subsidies. However, nationwide empirical evidence has been lacking or based on inadequate county-level data. This article uses nationwide farm-level data on corn and soybeans to decompose incentives for participation in U.S. multiple peril crop insurance into a risk-aversion incentive (the conventional justification for insurance), an actuarial or subsidy incentive (reflecting government subsidization), and an asymmetric information incentive (which reflects farmers' information advantage). Results show that the risk-aversion incentive is small. Farmers participate in crop insurance primarily to receive the subsidy or because of adverse selection possibilities. Copyright 1999, Oxford University Press.

Date: 1999
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Working Paper: Adverse Selection in Crop Insurance: Actuarial and Asymmetric Information Incentives (1993)
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