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Designing Optimal Crop Revenue Insurance

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  • Olivier Mahul
  • Brian D. Wright

Abstract

When the indemnity schedule is contingent on the farmer's price and individual yield, an optimal crop revenue insurance contract depends only on the farmer's gross revenue. However, this design is not efficient if, as is the case with available contracts, the coverage function is based on imperfect estimators of individual yield and/or price. The producer's degree of prudence and the extent of basis risks have important influences on the optimal indemnity schedule. In this broader context, optimal protection is not provided by available U.S. crop insurance contracts and may include combinations of revenue insurance, yield insurance, futures, and options contracts. Copyright 2003, Oxford University Press.

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Bibliographic Info

Article provided by Agricultural and Applied Economics Association in its journal American Journal of Agricultural Economics.

Volume (Year): 85 (2003)
Issue (Month): 3 ()
Pages: 580-589

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Handle: RePEc:oup:ajagec:v:85:y:2003:i:3:p:580-589

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References

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  1. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1995. "Budgetary and Resource Allocation Effects of Revenue Assurance," Center for Agricultural and Rural Development (CARD) Publications 95-wp130, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  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. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economics Reports 34081, United States Department of Agriculture, Economic Research Service.
  4. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
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Cited by:
  1. Umarov, Alisher & Sherrick, Bruce J., 2005. "Farmers' Subjective Yield Distributions: Calibration and Implications for Crop Insurance Valuation," 2005 Annual meeting, July 24-27, Providence, RI 19396, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. Hennessy, David A. & Saak, Alexander E. & Babcock, Bruce A., 2003. "Fair Value Of Whole-Farm And Crop-Specific Revenue Insurance," 2003 Annual meeting, July 27-30, Montreal, Canada 21988, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  3. Ashok Mishra & Barry Goodwin, 2006. "Revenue insurance purchase decisions of farmers," Applied Economics, Taylor & Francis Journals, vol. 38(2), pages 149-159.
  4. Kapphan, Ines, 2011. "Weather insurance design with optimal hedging effectiveness," MPRA Paper 35861, University Library of Munich, Germany.
  5. Zant, Wouter, 2008. "Hot Stuff: Index Insurance for Indian Smallholder Pepper Growers," World Development, Elsevier, vol. 36(9), pages 1585-1606, September.
  6. Chad E. Hart & Dermot J. Hayes & Bruce A. Babcock, 2006. "Insuring Eggs in Baskets: Should the Government Insure Individual Risks?," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 54(1), pages 121-137, 03.
  7. Egelkraut, Thorsten M. & Garcia, Philip & Pennings, Joost M.E. & Sherrick, Bruce J., 2006. "Producers' Yield and Yield Risk: Perceptions versus Reality and Crop Insurance Use," 2006 Annual meeting, July 23-26, Long Beach, CA 21369, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  8. Alan Matthews, 2010. "Perspectives on Addressing Market Instability and Income Risk for Farmers," The Institute for International Integration Studies Discussion Paper Series iiisdp324, IIIS, revised Apr 2010.
  9. Robert Finger & Nadja El Benni, 2012. "A Note on Price Risks in Swiss Crop Production – Empirical Results and Comparisons with other Countries," Yearbook of Socioeconomics in Agriculture, Swiss Society for Agricultural Economics and Rural Sociology, vol. 5(1), pages 131-151.
  10. Heidelbach, Olaf, 2007. "Efficiency of selected risk management instruments: An empirical analysis of risk reduction in Kazakhstani crop production," Studies on the Agricultural and Food Sector in Central and Eastern Europe, Leib­niz Institute of Agricultural Development in Central and Eastern Europe (IAMO), volume 40, number 92323.
  11. Pigeon, Mathieu & Frahan, Bruno Henry de & Denuit, Michel, 2012. "Actuarial evaluation of the EU proposed farm income stabilisation tool," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122485, European Association of Agricultural Economists.
  12. Wang, H. Holly & Hanson, Steven D. & Black, J. Roy, 2003. "Efficiency Costs of Subsidy Rules for Crop Insurance," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 28(01), April.
  13. Goodwin, Barry K. & Mahul, Olivier, 2004. "Risk modeling concepts relating to the design and rating of agricultural insurance contracts," Policy Research Working Paper Series 3392, The World Bank.
  14. Nyambane, Gerald G. & Hanson, Steven D. & Myers, Robert J. & Black, J. Roy, 2002. "Dynamic Risk Management Under Credit Constraints," 2002 Conference, April 22-23, 2002, St. Louis, Missouri 19072, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  15. Molini, Vasco & Keyzer, Michiel A. & van den Boom, Bart & Zant, Wouter, 2007. "Creating safety nets through semi-parametric index-based insurance: A simulation for Northern Ghana," 101st Seminar, July 5-6, 2007, Berlin Germany 9263, European Association of Agricultural Economists.
  16. Phelippe-Guinvarc'h, Martial V. & Cordier, Jean E., 2006. "A private management strategy for the crop yield insurer: A theoretical approach and tests," Insurance: Mathematics and Economics, Elsevier, vol. 39(1), pages 35-46, August.
  17. Phelippe-Guinvarc'h, Martial, 2007. "Weather Insurance of Wine - How Quantity and Quality Regulations Affect Risks," 101st Seminar, July 5-6, 2007, Berlin Germany 9258, European Association of Agricultural Economists.

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