Agricultural Finance Markets in Transition: Risk Sharing and Incentives with Crop Insurance and External Equity Financing

Sangtaek Sea, David Leatham and Paul Mitchell

No 301991, Research Bulletins from Cornell University, Department of Applied Economics and Management

Abstract: Farmers have increasingly been procuring external equity financing through either written or verbal business arrangements. Passage of the Agricultural Risk Protection Act in 2000 has resulted in widespread adoption of crop insurance among farmers. Crop insurance changes farmers’ production decisions, so that investors providing external equity may want to adjust the equity financing contract to account for these changes. This paper uses a principal-agent model to determine optimal risk sharing and incentives under crop insurance and external equity financing. Results show that with the introduction of crop insurance, the investor’s optimal equity financing contract requires that the farmer bears more risk in order to have the incentive to work hard.

Keywords: Agricultural; Finance (search for similar items in EconPapers)
Pages: 17
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:ags:cudarb:301991

DOI: 10.22004/ag.econ.301991

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