Actuarially Fair or Foul? Asymmetric Information Problems in Dairy Margin Insurance

John Newton and Cameron S. Thraen

No 285796, 2013 Conference, April 22-23, 2013, St. Louis, Missouri from NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: There is a wide consensus in the academic literature that asymmetric information in the form of adverse selection and moral hazard has resulted in sizable financial outlays for governmentsponsored crop insurance programs - ultimately becoming a costly means of transferring risk from farmers to the government. In this analysis we combine simulation and structural modeling techniques to forecast dairy income-over-feed-cost margins and show how asymmetric information problems may drive industry consolidation, production growth, and unforeseen program costs for a recently proposed government-sponsored dairy producer margin insurance program. We conclude by presenting second-best solutions in contract design to the insurance problems of moral hazard and adverse selection.

Keywords: Marketing (search for similar items in EconPapers)
Date: 2013-04
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Persistent link: https://EconPapers.repec.org/RePEc:ags:n13413:285796

DOI: 10.22004/ag.econ.285796

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