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On the role of probability weighting on WTP for crop insurance with and without yield skewness

Douadia Bougherara and Laurent Piet ()

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Abstract: A growing number of studies in finance and economics seek to explain insurance choices us- ing the assumptions advanced by behavioral economics. One recent example in agricultural economics is the use of cumulative prospect theory (CPT) to explain farmer choices regarding crop insurance coverage levels (Babcock, 2015). We build upon this framework by deriving willingness to pay (WTP) for insurance programs under alternative assumptions, thus extend- ing the model to incorporate farmer decisions regarding whether or not to purchase insurance. Our contribution is twofold. First, we study the sensitivity of farmer WTP for crop insurance to the inclusion of CPT parameters. We find that loss aversion and probability distortion in- crease WTP for insurance while risk aversion decreases it. Probability distortion in losses plays a particularly important role. Second, we study the impact of yield distribution skewness on farmer WTP assuming CPT preferences. We find that WTP decreases when the distribution of yields moves from negatively- to positively-skewed and that the combined effect of proba- bility weighting in losses and skewness has a large negative impact on farmer WTP for crop insurance.

Keywords: crop insurance; cumulative prospect theory; premium subsidy; Skewness; théorie des perspectives cumulées; subvention de la prime d’assurance; assurance récolte (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias and nep-upt
Date: 2018
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01911611
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Published in [University works] Inconnu. 2018, 32 p

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Working Paper: On the role of probability weighting on WTP for crop insurance with and without yield skewness (2018) Downloads
Working Paper: On the role of probability weighting on WTP for crop insurance with and without yield skewness (2018) Downloads
Working Paper: On the role of probability weighting on WTP for crop insurance with and without yield skewness (2018) Downloads
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