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Using a Farmer's Beta for Improved Estimation of Expected Yields

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Author Info

  • Carriquiry, Miguel A.
  • Babcock, Bruce A.
  • Hart, Chad E.

Abstract

Effects of sampling error in estimation of farmers’ mean yields for crop insurance purposes and their implications for actuarial soundness are explored using farm-level corn yield data in Iowa. Results indicate that sampling error, combined with nonlinearities in the indemnity function, leads to empirically estimated insurance rates that exceed actuarially fair values. The difference depends on the coverage level, the number of observations used, and the participation strategy followed by farmers. A new estimator for mean yields based on the decomposition of farm yields into systemic and idiosyncratic components is proposed, which could lead to improved rate-making and reduce adverse selection.

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File URL: http://purl.umn.edu/36707
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Bibliographic Info

Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

Volume (Year): 33 (2008)
Issue (Month): 01 (April)
Pages:

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Handle: RePEc:ags:jlaare:36707

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Web page: http://waeaonline.org/
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Related research

Keywords: actual production history (APH); adverse selection; crop insurance; mean yields estimation; sampling error; Crop Production/Industries; Farm Management;

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References

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  1. Zanini, Fabio C. & Sherrick, Bruce J. & Schnitkey, Gary D. & Irwin, Scott H., 2001. "Crop Insurance Valuation Under Alternative Yield Distributions," 2001 Conference, April 23-24, 2001, St. Louis, Missouri 18953, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  2. Olivier Mahul, 1999. "Optimum Area Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(1), pages 75-82.
  3. Bharat Ramaswami & Terry L. Roe, 2004. "Aggregation in Area-Yield Crop Insurance: The Linear Additive Model," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(2), pages 420-431.
  4. James A. Vercammen, 2000. "Constrained Efficient Contracts for Area Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 856-864.
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Cited by:
  1. Adhikari, Shyam & Knight, Thomas O. & Belasco, Eric J., 2012. "Evaluation of Crop Insurance Yield Guarantees and Producer Welfare with Upward-Trending Yields," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 41(3), December.
  2. Octavio A. Ramirez & Carlos A. Carpio, 2012. "Premium estimation inaccuracy and the actuarial performance of the US crop insurance program," Agricultural Finance Review, Emerald Group Publishing, vol. 72(1), pages 117-133, March.
  3. Ramirez, Octavio A. & Carpio, Carlos E. & Rejesus, Roderick M., 2011. "Can Crop Insurance Premiums Be Reliably Estimated?," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 40(1), April.

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