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Using The Spatial Statistics Approach To Analyze Yield Risk Pooling In The Us

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  • Wang, H. Holly
  • Zhang, Hao
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    Abstract

    Risk theory tells us if an insurer can effectively pool a large number of individuals to reduce the total risk, he then can provide the insurance by charging a premium close to the actuarially fair rate. There is, however, a common belief that the risk can be effectively pooled only when the random loss is independent, so that crop insurance markets cannot survive without government subsidy because crop yields are not independent among growers. In this paper, we take a a spatial statistics approach to examine the effectiveness of risk pooling for crop insurance under correlation. We develop a method for evaluating the effectiveness of risk pooling under correlation and apply the method to three major crops in the US: wheat, soybeans and corn. The empirical study shows that yields for the three crops present zero or negative correlation when two counties are far apart, which complies with a weaker condition than independence, finite-range positive dependency. The results show that effective risk pooling is possible and reveal a high possibility of a private crop insurance market in the US.

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    File URL: http://purl.umn.edu/19633
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    Bibliographic Info

    Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2002 Annual meeting, July 28-31, Long Beach, CA with number 19633.

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    Date of creation: 2002
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    Handle: RePEc:ags:aaea02:19633

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    Keywords: Risk and Uncertainty;

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    1. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1995. "Budgetary and Resource Allocation Effects of Revenue Assurance: Summary of Results, The," Center for Agricultural and Rural Development (CARD) Publications 95-bp7, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    2. Mario J. Miranda & Joseph W. Glauber, 1997. "Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 206-215.
    3. Roberts, Roland K. & English, Burton C. & Mahajanashetti, S.B., 2000. "Evaluating The Returns To Variable Rate Nitrogen Application," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(01), April.
    4. Jerry R. Skees & J. Roy Black & Barry J. Barnett, 1997. "Designing and Rating an Area Yield Crop Insurance Contract," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 430-438.
    5. Steven D. Hanson & Robert J. Myers & J. Roy Black, 1998. "The Effects of Crop Yield Insurance Designs on Farmer Participation and Welfare," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(4), pages 806-820.
    6. Skees, Jerry R. & Harwood, Joy L. & Somwaru, Agapi & Perry, Janet E., 1998. "The Potential For Revenue Insurance Policies In The South," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 30(01), July.
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