IDEAS home Printed from https://ideas.repec.org/a/ags/jlaare/31076.html
   My bibliography  Save this article

The Accuracy Of Producers' Probability Beliefs: Evidence And Implications For Insurance Valuation

Author

Listed:
  • Sherrick, Bruce J.

Abstract

The accuracy of producers' subjective probability beliefs is examined through a survey of large cash-grain farmers in Illinois. Findings reveal that their subjective probability beliefs about important weather variables are systematically mis-calibrated. The nature and extent of differences between subjective probability beliefs and probabilities based on long-term historic weather data are shown empirically, and through fitted calibration functions. The economic significance of inaccurate subjective probability beliefs is established in the context of insurance valuation. The results demonstrate that significant errors in producers' risk assessments and insurance valuation arise as a consequence of producers' systematically inaccurate probability beliefs.

Suggested Citation

  • Sherrick, Bruce J., 2002. "The Accuracy Of Producers' Probability Beliefs: Evidence And Implications For Insurance Valuation," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 27(01), pages 1-17, July.
    • Handle: RePEc:ags:jlaare:31076
    DOI: 10.22004/ag.econ.31076
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/31076/files/27010077.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.31076?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Richard H. Day, 1965. "Probability Distributions of Field Crop Yields," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 47(3), pages 713-741.
    2. James W. Pease & Ernest W. Wade & Jerry S. Skees & Chandra M. Shrestha, 1993. "Comparisons between Subjective and Statistical Forecasts of Crop Yields," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 15(2), pages 339-350.
    3. Daniel O'Brien & Marvin Hayenga & Bruce Babcock, 1996. "Deriving Forecast Probability Distributions of Harvest-Time Corn Futures Prices," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 18(2), pages 167-180.
    4. Richard E. Just & Linda Calvin & John Quiggin, 1999. "Adverse Selection in Crop Insurance: Actuarial and Asymmetric Information Incentives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 834-849.
    5. David E. Kenyon, 2001. "Producer Ability to Forecast Harvest Corn and Soybean Prices," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 23(1), pages 151-162.
    6. James S. Eales & Brian K. Engel & Robert J. Hauser & Sarahelen R. Thompson, 1990. "Grain Price Expectations of Illinois Farmers and Grain Merchandisers," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(3), pages 701-708.
    7. Keith H. Coble & Thomas O. Knight & Rulon D. Pope & Jeffery R. Williams, 1997. "An Expected-Indemnity Approach to the Measurement of Moral Hazard in Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 216-226.
    8. Alan P. Ker & Barry K. Goodwin, 2000. "Nonparametric Estimation of Crop Insurance Rates Revisited," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(2), pages 463-478.
    9. Vincent H. Smith & Barry K. Goodwin, 1996. "Crop Insurance, Moral Hazard, and Agricultural Chemical Use," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 428-438.
    10. Martin, Steven W. & Barnett, Barry J. & Coble, Keith H., 2001. "Developing And Pricing Precipitation Insurance," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(01), pages 1-14, July.
    11. Takeshi Sakurai & Thomas Reardon, 1997. "Potential Demand for Drought Insurance in Burkina Faso and Its Determinants," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1193-1207.
    12. Stokes, Jeffrey R., 2000. "A Derivative Security Approach To Setting Crop Revenue Coverage Insurance Premiums," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(01), pages 1-18, July.
    13. Machina, Mark J & Schmeidler, David, 1992. "A More Robust Definition of Subjective Probability," Econometrica, Econometric Society, vol. 60(4), pages 745-780, July.
    14. B. S. Fisher & Carolyn Tanner, 1978. "The Formulation of Price Expectations: An Empirical Test of Theoretical Models," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 60(2), pages 245-248.
    15. David A. Bessler & John L. Kling, 1990. "Prequential Analysis of Cattle Prices," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 39(1), pages 95-106, March.
    16. Robert G. Nelson & David A. Bessler, 1989. "Subjective Probabilities and Scoring Rules: Experimental Evidence," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(2), pages 363-369.
    17. Barry K. Goodwin & Alan P. Ker, 1998. "Nonparametric Estimation of Crop Yield Distributions: Implications for Rating Group-Risk Crop Insurance Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 139-153.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Agarwal, Sandip Kumar, 2017. "Subjective beliefs and decision making under uncertainty in the field," ISU General Staff Papers 201701010800006248, Iowa State University, Department of Economics.
    2. Bulut, Harun & Collins, Keith J., 2013. "Political Economy of Crop Insurance Risk Subsidies under Imperfect Information," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150577, Agricultural and Applied Economics Association.
    3. Agarwal, Sandip & Jacobs, Keri L. & Weninger, Quinn, 2016. "Elicitation of Subjective Beliefs: A Pilot study of farmers' nitrogen management decision-making in Central Iowa," ISU General Staff Papers 201601010800001005, Iowa State University, Department of Economics.
    4. Umarov, Alisher & Sherrick, Bruce J., 2005. "Farmers' Subjective Yield Distributions: Calibration and Implications for Crop Insurance Valuation," 2005 Annual meeting, July 24-27, Providence, RI 19396, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Allison M. Chatrchyan & Rachel C. Erlebacher & Nina T. Chaopricha & Joana Chan & Daniel Tobin & Shorna B. Allred, 2017. "United States agricultural stakeholder views and decisions on climate change," Wiley Interdisciplinary Reviews: Climate Change, John Wiley & Sons, vol. 8(5), September.
    6. Hong Fu & Yuehua Zhang & Yinuo An & Li Zhou & Yanling Peng & Rong Kong & Calum G. Turvey, 2022. "Subjective and objective risk perceptions and the willingness to pay for agricultural insurance: evidence from an in-the-field choice experiment in rural China," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 47(1), pages 98-121, March.
    7. Bulut, Harun, 2017. "Managing Catastrophic Risk in Agriculture through Ex Ante Subsidized Insurance or Ex Post Disaster Aid," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 42(3), September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sherrick, Bruce J., 2001. "The Accuracy Of Producer Expectations: Evidence And Implications For Insurance Valuation," 2001 Regional Committee NC-221, October 1-2, 2001, McLean, Virginia 132390, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    2. Ghahremanzadeh, Mohammad & Mohammadrezaei, Rassul & Dashti, Ghader & Ainollahi, Moharram, 2018. "Designing a whole-farm revenue insurance for agricultural crops in Zanjan province of Iran," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 17(02), January.
    3. Barnett, Barry J. & Barrett, Christopher B. & Skees, Jerry R., 2008. "Poverty Traps and Index-Based Risk Transfer Products," World Development, Elsevier, vol. 36(10), pages 1766-1785, October.
    4. Hao, Jianqiang & Bathke, Arne & Skees, Jerry R., 2005. "Modeling the Tail Distribution and Ratemaking: An Application of Extreme Value Theory," 2005 Annual meeting, July 24-27, Providence, RI 19190, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Vedenov, Dmitry V. & Barnett, Barry J., 2004. "Efficiency of Weather Derivatives as Primary Crop Insurance Instruments," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(3), pages 1-17, December.
    6. Deng, Xiaohui & Barnett, Barry J. & Hoogenboom, Gerrit & Yu, Yingzhuo & Garcia y Garcia, Axel, 2008. "Alternative Crop Insurance Indexes," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 40(01), pages 1-15, April.
    7. Ramirez, Octavio A. & Shonkwiler, J. Scott, 2017. "A Probabilistic Model of Crop Insurance Purchase Decision," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 42(01), pages 1-17, January.
    8. Deng, Xiaohui & Barnett, Barry J. & Hoogenboom, Gerrit & Yu, Yingzhuo & Garcia, Axel, 2006. "Evaluating the Efficiency of Crop Index Insurance Products," 2006 Annual Meeting, February 5-8, 2006, Orlando, Florida 35333, Southern Agricultural Economics Association.
    9. Barnett, Barry J., 2004. "Agricultural Index Insurance Products: Strengths And Limitations," Agricultural Outlook Forum 2004 32971, United States Department of Agriculture, Agricultural Outlook Forum.
    10. Chen, Shu-Ling & Miranda, Mario J., 2006. "Modeling Yield Distribution In High Risk Counties: Application To Texas Upland Cotton," 2006 Annual meeting, July 23-26, Long Beach, CA 21392, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    11. F. G. Santeramo & B. K. Goodwin & F. Adinolfi & F. Capitanio, 2016. "Farmer Participation, Entry and Exit Decisions in the Italian Crop Insurance Programme," Journal of Agricultural Economics, Wiley Blackwell, vol. 67(3), pages 639-657, September.
    12. Lu, Yue & Ramirez, Octavio A. & Rejesus, Roderick M. & Knight, Thomas O. & Sherrick, Bruce J., 2008. "Empirically Evaluating the Flexibility of the Johnson Family of Distributions: A Crop Insurance Application," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 37(01), pages 1-13, April.
    13. Phoebe Koundouri & Nikolaos Kourogenis, 2011. "On the Distribution of Crop Yields: Does the Central Limit Theorem Apply?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(5), pages 1341-1357.
    14. Coble, Keith H. & Barnett, Barry J., 1999. "The Role Of Research In Producer Risk Management," Professional Papers 15803, Mississippi State University, Department of Agricultural Economics.
    15. Myyra, Sami & Pietola, Kyosti, 2011. "Testing for Moral Hazard and Ranking Farms by Their Inclination to Collect Crop Damage Compensations," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114632, European Association of Agricultural Economists.
    16. Peilu Zhang & Marco A. Palma, 2021. "Compulsory Versus Voluntary Insurance: An Online Experiment," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(1), pages 106-125, January.
    17. Sharma, Sankalp & Walters, Cory G., 2018. "Influence of Farm and Lease Type on Crop Insurance Returns," 2018 Annual Meeting, August 5-7, Washington, D.C. 273881, Agricultural and Applied Economics Association.
    18. Zheng, Qiujie & Wang, H. Holly & Shi, Qinghua, 2008. "Estimating Farm Level Multivariate Yield Distribution Using Nonparametric Methods," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6509, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    19. Pena-Levano, Luis M. & Ramirez, Octavio & Renteria-Pinon, Mario, 2015. "Efficiency Gains in Commodity Forecasting with High Volatility in Prices using Different Levels of Data Aggregation," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205740, Agricultural and Applied Economics Association.
    20. Phelippe-Guinvarc'h, Martial V. & Cordier, Jean E., 2006. "A private management strategy for the crop yield insurer: A theoretical approach and tests," Insurance: Mathematics and Economics, Elsevier, vol. 39(1), pages 35-46, August.

    More about this item

    Keywords

    Risk and Uncertainty;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:jlaare:31076. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/waeaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.