Three essays on the decision-making and consequences of farmers’ crop insurance participation

Xuche Gong

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This dissertation comprises three essays examining farmers’ crop insurance participation decisions and their consequences. Chapter 2 investigates whether U.S. farmers can use crop insurance to guarantee break-even status and introduces a novel target income model to explore how the break-even goal affects farmers’ crop insurance decisions. Using data from a recent farmer survey, we find that approximately 89% of farmers can use crop insurance to secure break-even status, with over 75% choosing to do so. Our empirical evidence is consistent with the predictions of our theoretical model, providing insights into farmers’ risk management strategies. Chapter 3 examines how the basis risk feature in area yield insurance (AYI) affects farmers’ adoption decisions regarding high-risk, high-yield new technologies with imperfectly correlated yield risks relative to existing technologies. We establish a model where basis risk is endogenous to the share of farmers adopting the new technology. Our analysis reveals that the provision of AYI can create strategic complementarity in farmers’ technology adoption decisions, uncovering a new channel through which coordination can facilitate technology adoption. Chapter 4 investigates the effects of the traditional multi-peril Revenue Protection (RP) policy and the newly introduced single-peril Post Application Coverage Endorsement (PACE) on farmers’ split nitrogen application (SNA) decisions. We show that, under risk-neutral conditions and in the absence of premium subsidies, both PACE and RP discourage SNA adoption. This discouraging effect is greater when PACE is bundled as an add-on policy with RP, as currently implemented by the Federal Crop Insurance Program (FCIP).

Date: 2025-02-11
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