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Using a Farmer's Beta for Improved Estimation of Expected Yields

  • Carriquiry, Miguel A.
  • Babcock, Bruce A.
  • Hart, Chad E.

Effects of sampling error in estimation of farmers’ mean yields for crop insurance purposes and their implications for actuarial soundness are explored using farm-level corn yield data in Iowa. Results indicate that sampling error, combined with nonlinearities in the indemnity function, leads to empirically estimated insurance rates that exceed actuarially fair values. The difference depends on the coverage level, the number of observations used, and the participation strategy followed by farmers. A new estimator for mean yields based on the decomposition of farm yields into systemic and idiosyncratic components is proposed, which could lead to improved rate-making and reduce adverse selection.

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File URL: http://purl.umn.edu/36707
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Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

Volume (Year): 33 (2008)
Issue (Month): 01 (April)
Pages:

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Handle: RePEc:ags:jlaare:36707
Contact details of provider: Web page: http://waeaonline.org/
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  1. James A. Vercammen, 2000. "Constrained Efficient Contracts for Area Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 856-864.
  2. Barnett, Barry J. & Black, J. Roy & Hu, Yingyao & Skees, Jerry R., 2005. "Is Area Yield Insurance Competitive with Farm Yield Insurance?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 30(02), August.
  3. 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.
  4. Olivier Mahul, 1999. "Optimum Area Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(1), pages 75-82.
  5. Bharat Ramaswami & Terry L. Roe, 2004. "Aggregation in Area-Yield Crop Insurance: The Linear Additive Model," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(2), pages 420-431.
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