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Designing Optimal Crop Revenue Insurance

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  • Mahul, Olivier
  • Wright, Brian D.

Abstract

The optimal crop revenue insurance contract is designed from recent developments in the theory of insurance economics under incomplete markets. The message is two-fold. Firstly, when the indemnity schedule is contingent on individual price and individual yield, the optimal contract depends only on the individual gross revenue. Secondly, this policy is shown to fail if the indemnity function is based on aggregate price and/or aggregate yield. A closed-form solution, in which basis risks are ignored, is proposed. It differs from actual revenue insurance programs proposed to the U.S. farmers. When insurance and capital markets are unbiased, it can be replicated with existing crop yield and revenue insurance policies and hedging contracts if the decision variables are not constrained. The impact of yield and price basis risks on the form of the optimal crop revenue insurance contract is examined and a closed-form solution is derived.

Suggested Citation

  • Mahul, Olivier & Wright, Brian D., 2000. "Designing Optimal Crop Revenue Insurance," 2000 Annual meeting, July 30-August 2, Tampa, FL 21729, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea00:21729
    DOI: 10.22004/ag.econ.21729
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    1. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economic Reports 34081, United States Department of Agriculture, Economic Research Service.
    2. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    3. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1024-1034.
    4. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1024-1034.
    5. Calm G. Turvey, 1992. "An Economic Analysis of Alternative Farm Revenue Insurance Policies," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 40(3), pages 403-426, November.
    6. Olivier Mahul, 1999. "Optimum area yield crop insurance," Post-Print hal-01952090, HAL.
    7. Olivier Mahul, 1999. "Optimum Area Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(1), pages 75-82.
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    Keywords

    Agricultural Finance; Risk and Uncertainty;

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