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Managing Catastrophic Risk in Agriculture through Ex Ante Subsidized Insurance or Ex Post Disaster Aid

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  • Bulut, Harun

Abstract

We consider a political economy in which government cares about risk-averse farmers’ loss of income but incurs political cost if it provides monetary support to farmers. Farmers’ expectations of government disaster aid and overconfidence (optimism bias) regarding their risk prevent farmers from purchasing full insurance under actuarially fair rates. Considering this conclusion, government prefers to subsidize farmers’ purchases of insurance ex ante rather than solely relying on disaster aid ex post. The resulting subsidy rate depends on the political environment, the degree of systemic risk, the distribution of farmers’ risk preferences, and the nature and distribution of farmers’ risk perceptions.

Suggested Citation

  • 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.
    • Handle: RePEc:ags:jlaare:264070
    DOI: 10.22004/ag.econ.264070
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    Cited by:

    1. Bulut, Harun, 2016. "Economic Design for the Supply Side of Agricultural Insurance Markets," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 236008, Agricultural and Applied Economics Association.
    2. Fezzi, Carlo & Menapace, Luisa & Raffaelli, Roberta, 2021. "Estimating risk preferences integrating insurance choices with subjective beliefs," European Economic Review, Elsevier, vol. 135(C).
    3. Hongli Feng & Xiaodong Du & David A. Hennessy, 2020. "Depressed demand for crop insurance contracts, and a rationale based on third generation Prospect Theory," Agricultural Economics, International Association of Agricultural Economists, vol. 51(1), pages 59-73, January.
    4. Xiaodong Du & Hongli Feng & David A. Hennessy, 2017. "Rationality of Choices in Subsidized Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(3), pages 732-756.
    5. Bulut, Harun, 2016. "U.S. Farmers’ Insurance Choices under Expected Utility Theory and Cumulative Prospect Theory," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 236019, Agricultural and Applied Economics Association.
    6. Xuche Gong & David A. Hennessy & Hongli Feng, 2023. "Systemic risk, relative subsidy rates, and area yield insurance choice," American Journal of Agricultural Economics, John Wiley & Sons, vol. 105(3), pages 888-913, May.

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