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Aggregation in area yield insurance:The linear additive model

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Author Info
Bharat Ramaswami () (Indian Statistical Institute, New Delhi)
Terry L. Roe () (University of Minnesota)

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Abstract

Earlier analyses of area yield crop insurance schemes used a linear additive model (LAM) to express the relationship between individual and area yield. Although similar to the capital asset pricing model used in finance, the theoretical foundations of the LAM are unknown. A contribution of this paper is the derivation of the precise conditions under which area aggregation results in a LAM, thus establishing a link between micro variables and LAM parameters. The conditions are two-fold. They relate to the interaction of risks in individual technologies and on the extent of aggregation. We show that if systemic and individual risks are additive in individual yields and if the aggregation is such that the law of large numbers hold then the LAM obtains. The paper also shows how departures from these conditions affect the results derived from a LAM analysis.

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Publisher Info
Paper provided by Indian Statistical Institute, New Delhi, India in its series Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers with number 02-08.

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Length: 32 pages
Date of creation: Aug 2002
Date of revision:
Handle: RePEc:ind:isipdp:02-08

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Related research
Keywords: Area yield; Beta; Crop insurance; Systemic risks;

Find related papers by JEL classification:
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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  1. Merton, Robert, 1990. "Capital market theory and the pricing of financial securities," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 11, pages 497-581 Elsevier. [Downloadable!] (restricted)
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  2. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January. [Downloadable!] (restricted)
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