The effect of sampling error in estimation of farmers' mean yields for crop insurance purposes is explored using farm-level corn yield data in Iowa from 1990 to 2000 and Monte Carlo simulations. We find that sampling error combined with nonlinearities in the insurance indemnity function will result in empirically estimated crop insurance rates that exceed actuarially fair values by between 2 and 16 percent, depending on the coverage level and the number of observations used to estimate mean yields. Accounting for the adverse selection caused by sampling error results in crop insurance rates that will exceed fair values by between 42 and 127 percent. We propose a new estimator for mean yields based on a common decomposition of farm yields into systemic and idiosyncratic components. The proposed estimator reduces sampling variance by approximately 45 percent relative to the current estimator.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: