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Testing for Moral Hazard and Ranking Farms by Their Inclination to Collect Crop Damage Compensations

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  • Myyra, Sami
  • Pietola, Kyosti

Abstract

This paper tests for the extent of moral hazard problem within a Crop Damage Compensation (CDC) program that is similar to traditional multi peril crop insurances but is publicly funded and openly accessible for all farmers in Finland. We further estimate the potential of using the observed farmer and farm characteristics in ranking and classifying farms according to their incidence towards losses when they are protected. The data are the claimed and granted indemnity payments for each farm over the fifteen year period of 1995-2009. These data are complemented by data on total farm population in 2005. The data suggest that most of the farmers (60%) have not made any claims in the CDC program over the 15 year period. Those farms that claimed compensation did so typically either once or twice within the 15 year period. Nevertheless, a substantial number of farmers have claimed and also granted indemnity payments more regularly than can be justified by the exogenous (aggregate level) yield distributions. Based on the logit models, farmers and farms with certain observed characteristics are more inclined to the losses than the others. In general presence of animals declines the probability of crop damage. However, the existence of different animals on the farm classifies the farms by their inclination to collect crop damage compensations. In addition, the fixed municipality effects are significant indicating that the persons in charge for appraising the losses implement different standards

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Bibliographic Info

Paper provided by European Association of Agricultural Economists in its series 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland with number 114632.

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Date of creation: 02 Sep 2011
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Handle: RePEc:ags:eaae11:114632

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Keywords: Farm Management; Risk and Uncertainty;

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  1. Richard E. Just & Linda Calvin & John Quiggin, 1999. "Adverse Selection in Crop Insurance: Actuarial and Asymmetric Information Incentives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 834-849.
  2. 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.
  3. Weninger, Quinn & Just, Richard E., 1999. "Are Crop Yields Normally Distributed?," Staff General Research Papers 5064, Iowa State University, Department of Economics.
  4. Vincent H. Smith & Barry K. Goodwin, 1996. "Crop Insurance, Moral Hazard, and Agricultural Chemical Use," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 428-438.
  5. Maybery, Darryl & Crase, Lin & Gullifer, Chris, 2005. "Categorising farming values as economic, conservation and lifestyle," Journal of Economic Psychology, Elsevier, vol. 26(1), pages 59-72, February.
  6. Shingo Kimura & Jesús Antón & Christine LeThi, 2010. "Farm Level Analysis of Risk and Risk Management Strategies and Policies: Cross Country Analysis," OECD Food, Agriculture and Fisheries Papers 26, OECD Publishing.
  7. Keith H. Coble & Thomas O. Knight & Rulon D. Pope & Jeffery R. Williams, 1996. "Modeling Farm-Level Crop Insurance Demand with Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 439-447.
  8. Vincent H. Smith & Alan E. Baquet, 1996. "The Demand for Multiple Peril Crop Insurance: Evidence from Montana Wheat Farms," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(1), pages 189-201.
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Cited by:
  1. Liesivaara, Petri & Myyra, Sami & Jaakkola, Antti, 2012. "Feasibility of the Income Stabilisation Tool in Finland," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122537, European Association of Agricultural Economists.
  2. Liesivaara, Petri & Myyrä, Sami, 2014. "Government policies in changing climate and the demand for crop insurance," 88th Annual Conference, April 9-11, 2014, AgroParisTech, Paris, France 170520, Agricultural Economics Society.

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