Optimal area-yield crop insurance reconsidered

Optimal area-yield crop insurance reconsidered

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Article ID: iaor2005595
Country: United States
Volume: 85
Issue: 3
Start Page Number: 590
End Page Number: 604
Publication Date: Aug 2003
Journal: American Journal of Agricultural Economics
Authors: ,
Keywords: financial
Abstract:

The implementability of area-yield insurance contracts in the presence of symmetric and asymmetric information about the farmer's “beta” linking his yield to the risk-pool's yield is examined. In the presence of fixed costs and symmetric information Mahul's result that optimality requires setting the slope of the indemnity schedule equal to each farmer's beta is confirmed. When there is asymmetric information between the insurer and the farmer, however, this full-insurance contract is vulnerable to adverse selection, and therefore may not be implementable for general cost structures. The optimal area-yield insurance contract under asymmetric information is characterized.

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