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Moral hazard and adverse selection effects of cost‐of‐production crop insurance: evidence from the Philippines

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  • Juan He
  • Xiaoyong Zheng
  • Roderick M. Rejesus
  • Jose M. Yorobe

Abstract

This article examines the moral hazard and adverse selection effects of cost‐of‐production (COP) crop insurance products. Building on existing crop insurance models of moral hazard, as well as a survey‐based data set that allows us to separately identify moral hazard from adverse selection, we find evidence that farmers insured under COP contracts spend more on chemical fertilizers and pesticides (i.e. those inputs whose costs determine the indemnity payments). However, since these same COP insured farmers are still likely to use less inputs (like effort) whose costs do not enter the indemnity payment formula, and yield depends on both types of inputs (i.e. the determinants and non‐determinants of the indemnity payments), the final moral hazard effect of COP insurance on yields is ambiguous. Our analysis also suggests that farmers who tend to spend less on chemical fertilizers and pesticides are the ones with private information on soil conditions and pest incidence. These are the types of farmers who adversely select into COP contracts that only cover weather related losses.

Suggested Citation

  • Juan He & Xiaoyong Zheng & Roderick M. Rejesus & Jose M. Yorobe, 2019. "Moral hazard and adverse selection effects of cost‐of‐production crop insurance: evidence from the Philippines," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 63(1), pages 166-197, January.
  • Handle: RePEc:bla:ajarec:v:63:y:2019:i:1:p:166-197
    DOI: 10.1111/1467-8489.12290
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    Cited by:

    1. Juan He & Xiaoyong Zheng & Roderick Rejesus & Jose Yorobe, 2020. "Input use under cost‐of‐production crop insurance: Theory and evidence," Agricultural Economics, International Association of Agricultural Economists, vol. 51(3), pages 343-357, May.

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