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Moral hazard: the effect of insurance on risk and efficiency

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  • Kristin H. Roll

Abstract

While there is a large body of literature investigating the effect of crop and livestock insurance on input and yield, limited attention has been paid to the effect of insurance on efficiency. This article investigates how insurance affects technical efficiency and whether insurance alters the utilized input quantity to a riskier bundle using the Norwegian salmon farming industry as a case. The results illustrate that insurance has an enhancing effect on production and efficiency and changes the utilized input mix—a well‐insured farmer uses more feed and less capital and labor than a less‐insured farmer. When linking this to each input's risk profile, the results indicate that insurance will induce the use of the risk‐increasing factor (feed) and reduce the use of the risk‐decreasing factors (labor and capital)—thereby increasing production risk and indicating moral hazard.

Suggested Citation

  • Kristin H. Roll, 2019. "Moral hazard: the effect of insurance on risk and efficiency," Agricultural Economics, International Association of Agricultural Economists, vol. 50(3), pages 367-375, May.
    • Handle: RePEc:bla:agecon:v:50:y:2019:i:3:p:367-375
    DOI: 10.1111/agec.12490
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    Cited by:

    1. S. C. West & A. W. Mugera & R. S. Kingwell, 2022. "The choice of efficiency benchmarking metric in evaluating firm productivity and viability," Journal of Productivity Analysis, Springer, vol. 57(2), pages 193-211, April.
    2. Hui Mao & Shaojian Chen & RuiYao Ying & Yong Fu, 2023. "How crop insurance influences agrochemical input use: Evidence from cotton farmers in China," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 67(2), pages 224-244, April.
    3. Jianru Fu & Ruiyuan Shen & Chao Huang, 2023. "How does price insurance alleviate the fluctuation of agricultural product market? A dynamic analysis based on cobweb model," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 69(5), pages 202-211.
    4. Juan He & Xiaoyong Zheng & Roderick Rejesus & Jose Yorobe, 2020. "Input use under cost‐of‐production crop insurance: Theory and evidence," Agricultural Economics, International Association of Agricultural Economists, vol. 51(3), pages 343-357, May.
    5. Tao Li & Lihong Chen & Xiaoxu Li & Sha Li & Haibing Chen & Hao Ji, 2021. "The Impact of Cost-of-Production Insurance on Input Expense of Fruit Growing in Ecologically Vulnerable Areas: Evidence from Shaanxi Province of China," Sustainability, MDPI, vol. 13(21), pages 1-14, November.
    6. Shenan Wu & Barry K. Goodwin & Keith Coble, 2020. "Moral hazard and subsidized crop insurance," Agricultural Economics, International Association of Agricultural Economists, vol. 51(1), pages 131-142, January.

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