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Diversification in Area-Yield Crop Insurance: The Multi Linear Additive Model

Geoffroy Enjolras, Robert Kast and Patrick Sentis

Working Papers from LAMETA, Universtiy of Montpellier

Abstract: Diversification is the traditional way farmers use to hedge against crop yield variations. However, most insurance policies and financial contracts do not take into account this strategy in their design. In this context, we develop a of portfolio insurance model based on area-yield crop indices. This Multi-Linear Additive Model (Multi-LAM extends previous linear approaches while it preserves their theoretical properties. We determine the conditions of use of our model and prove that it can be used despite crop yields correlations. An application to a large sample of French farms reveals the potential extent of the Multi-LAM, which significantly reduces the area-yield basis risk associated to the use of indices. We then discuss implications for crop insurance.

Pages: 33 pages
Date: 2009-11, Revised 2009-11
New Economics Papers: this item is included in nep-agr and nep-ias
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