Modeling Crop Yields with Rare Downward Shocks: Implications for Crop Insurance

Sagar Dahal and Sergio Lence

No 404358, 2026 Annual Meeting, July 26 - 28, 2026, Kansas City, Missouri from Agricultural and Applied Economics Association

Abstract: This paper develops a regime-based framework for modeling county crop yields that explicitly accounts for rare catastrophic years and examines its implications for crop insurance rating. Yields are assumed to arise from two latent states of nature: a normal state, in which yields fluctuate around a deterministic trend, and a catastrophic state, in which yields experience substantial downward shocks. We apply the model to county-level corn and soybean yields for all 99 counties in Iowa and use the estimated yield distributions to derive crop insurance premiums. The model is estimated within a Bayesian hierarchical framework that incorporates spatial dependence across counties. The empirical results show that catastrophic yield realizations occur with non-negligible probability and are associated with sizable losses. The proposed model generates predictive yield densities with negative skewness and bimodality in some cases, and provides a regime-based interpretation of these distributional features. The results show that the proposed model can identify relatively profitable insurance policies and, in several specifications, is more efficient than the benchmark approach.

Keywords: Agricultural; and; Food; Policy (search for similar items in EconPapers)
Pages: 44
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
https://ageconsearch.umn.edu/record/404358/files/1 ... per_Upload_final.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:aaea26:404358

DOI: 10.22004/ag.econ.404358

Access Statistics for this paper

More papers in 2026 Annual Meeting, July 26 - 28, 2026, Kansas City, Missouri from Agricultural and Applied Economics Association Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().