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Moral Hazard Cycles in Individual-Coverage Crop Insurance

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  • James Vercammen
  • G. Cornelis van Kooten

Abstract

This paper examines the moral hazard implications of individual-coverage crop insurance contracts. Individual-coverage contracts are informationally superior to standard contracts because the farmer's coverage is proportional to his average historical yield. Despite this apparent benefit, the steady-state solution is shown to be characterized by moral hazard cycles, where moral hazard is practiced in alternative periods. The amplitude of the cycle and, thus, the variability in planned production is shown to be larger the lower the degree of production uncertainty, the fewer the number of years used in the averaging process, the higher the coverage threshold, and the lower the level of co-insurance.

Suggested Citation

  • James Vercammen & G. Cornelis van Kooten, 1994. "Moral Hazard Cycles in Individual-Coverage Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 250-261.
    • Handle: RePEc:oup:ajagec:v:76:y:1994:i:2:p:250-261.
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    File URL: http://hdl.handle.net/10.2307/1243626
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    Citations

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    Cited by:

    1. Rejesus, R. & Park, S. & Zheng, X. & Goodwin, G., 2018. "How does a Fraud Mitigation Program Influence Insurance Claims filing Behavior? Evidence from the "Spot Check List" Program in U.S. Crop Insurance," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277452, International Association of Agricultural Economists.
    2. Islam, Zahirul & Turvey, Calum G. & Hoy, Michael, 1999. "A Model Of Agricultural Insurance In Evaluating Asymmetric Information Problems," Working Papers 34103, University of Guelph, Department of Food, Agricultural and Resource Economics.
    3. Gustafson, Cole R. & Crane, Laurence M. & Fischer, William R., 1995. "Agronomic, Economic, and Demographic Characteristics of Crop Farms in the Great Plains and Corn Belt," Agricultural Economics Reports 23221, North Dakota State University, Department of Agribusiness and Applied Economics.
    4. Paloch Suchato & Taro Mieno & Karina Schoengold & Timothy Foster, 2022. "The potential for moral hazard behavior in irrigation decisions under crop insurance," Agricultural Economics, International Association of Agricultural Economists, vol. 53(2), pages 257-273, March.
    5. Joseph A. Atwood & James F. Robison-Cox & Saleem Shaik, 2006. "Estimating the Prevalence and Cost of Yield-Switching Fraud in the Federal Crop Insurance Program," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(2), pages 365-381.
    6. Smith, Vincent H. & Goodwin, Barry K., 2003. "An Ex Post Evaluation of the Conservation Reserve, Federal Crop Insurance, and Other Government Programs: Program Participation and Soil Erosion," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 28(2), pages 1-16, August.
    7. Charles E. Hyde & James A. Vercammen, 1997. "Costly Yield Verification, Moral Hazard, And Crop Insurance Contract Form," Journal of Agricultural Economics, Wiley Blackwell, vol. 48(1‐3), pages 393-407, January.
    8. Zaura Fadhliani & Jeff Luckstead & Eric J. Wailes, 2019. "The impacts of multiperil crop insurance on Indonesian rice farmers and production," Agricultural Economics, International Association of Agricultural Economists, vol. 50(1), pages 15-26, January.
    9. Bekkerman, Anton & Smith, Vincent H. & Watts, Myles J., 2012. "The SURE Program: An Investigation of Moral Hazard Opportunities and Adverse Selection Effects," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124178, Agricultural and Applied Economics Association.

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