Wheat Production in Semiarid Areas and the Role of Drought Compensation: Israeli Experience in Northern Negev

Moral hazard, a mostly inevitable byproduct of all insurance programmes, creates special difficulties in crop insurance programmes. In this study of drought compensation programmes in Israel's Northern Negev, moral hazard was reflected mostly by the transition from the least extensive crop rotation (which fallows some 50 percent of the land under atltivation) to the most extensive crop rotation (which fallows only 20 percent of the land). This transition caused a considerable waste in the budget and losses to the national economy. Nevertheless, drastic measures to abolish the programme in its entirety-as has scmetimes been suggested-may be even less desirable and more wasteful because the high risks involved in dryland fanning may deter farmers from cultivating these lands at all This dilemma. which is well known in many crop insurance programmes, may be resolved, at least for selected field crops, with use of aerial photography to monitor crop rotation and soil tillage practices. This study indicates that, by imposing appropriate restrictions on participating fanners with respect to their crop rotation, a large portion of the moral hazard can be eliminated, and the fiscal budget required for the programme can be drastically reduced: