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A Natural Resource Theory of U.S. Crop Insurance Contract Choice

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  • Xiaodong Du
  • David A. Hennessy
  • Hongli Feng

Abstract

A large variety of subsidized crop insurance products are available to U.S. crop growers. Distinct and perhaps puzzling patterns in the choices of insurance products and coverage levels can be discerned. Where production conditions are better and yields are less risky then (a) higher insurance coverage levels are chosen; and (b) revenue insurance is preferred over yield insurance. Also, (c) the extent of preference for revenue insurance is stronger in more productive areas. Assuming, as many do, that growers seek to maximize subsidy transfers, point (a) can be explained by the interaction between yield technology and natural resource endowments. Points (b) and (c) can be explained by location in conjunction with the "natural hedge" and a contract design bias in how revenue insurance guarantees are computed. Empirical study of Risk Management Agency data on corn, soybean, and wheat yields, and insurance contract choices lend support to our model inferences.

Suggested Citation

  • Xiaodong Du & David A. Hennessy & Hongli Feng, 2014. "A Natural Resource Theory of U.S. Crop Insurance Contract Choice," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 96(1), pages 232-252.
    • Handle: RePEc:oup:ajagec:v:96:y:2014:i:1:p:232-252.
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    Cited by:

    1. Holderieath, Jason, 2014. "Impact of Increased Crop Insurance Enrollment on Cropping of Environmentally Sensitive Land," 2014 AAEA: Crop Insurance and the 2014 Farm Bill Symposium: Implementing Change in U.S. Agricultural Policy, October 8-9, 2014, Louisville, KY 184269, Agricultural and Applied Economics Association.
    2. Feng, Hongli & Du, Xiaodong & Hennessy, David A., 2013. "An Analysis of Farmers' Insurance Choices and Federal Crop Insurance Subsidies," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151284, Agricultural and Applied Economics Association.
    3. Du, Xiaodong, 2025. "Inertia in the U.S. federal crop insurance market," International Journal of Industrial Organization, Elsevier, vol. 100(C).
    4. Che, Yuyuan & Feng, Hongli & Hennessy, David A., "undated". "The Geography and Psychology of Participation in U.S. Federal Crop Insurance Programs," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259190, Agricultural and Applied Economics Association.
    5. Soliwoda, Michał & Kulawik, Jacek & Góral, Justyna, . "Stabilizacja dochodów rolniczych. Perspektywa międzynarodowa, Unii Europejskiej i Polski," Village and Agriculture (Wieś i Rolnictwo), Polish Academy of Sciences (IRWiR PAN), Institute of Rural and Agricultural Development, vol. 3(172).
    6. Xiaodong Du & Hongli Feng & David A. Hennessy, 2017. "Rationality of Choices in Subsidized Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(3), pages 732-756.
    7. Nathan D. DeLay & Hayley H. Chouinard & Cory G. Walters & Philip R. Wandschneider, 2020. "The influence of crop insurance agents on coverage choices: The role of agent competition," Agricultural Economics, International Association of Agricultural Economists, vol. 51(4), pages 623-638, July.
    8. Kusumastuti, Ratih Dyah & Donk, Dirk Pieter van & Teunter, Ruud, 2016. "Crop-related harvesting and processing planning: a review," International Journal of Production Economics, Elsevier, vol. 174(C), pages 76-92.
    9. Chen, I-Chun & Du, Xiaodong & Mitchell, Paul D., "undated". "Policy Implications of Joint versus Separate Estimation of Crop Insurance Demand," 2018 Annual Meeting, August 5-7, Washington, D.C. 273878, Agricultural and Applied Economics Association.
    10. Xiaodong Du & Hongli Feng & David A. Hennessy, 2017. "Rationality of Choices in Subsidized Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(3), pages 732-756.
    11. Bulut, Harun, "undated". "U.S. Farmers’ Insurance Choices under Expected Utility Theory and Cumulative Prospect Theory," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 236019, Agricultural and Applied Economics Association.
    12. Xiaodong Du & David A Hennessy & Hongli Feng & Gaurav Arora, 2018. "Land Resilience and Tail Dependence among Crop Yield Distributions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(3), pages 809-828.
    13. Shuoli Zhao & Chengyan Yue, 2020. "Risk preferences of commodity crop producers and specialty crop producers: An application of prospect theory," Agricultural Economics, International Association of Agricultural Economists, vol. 51(3), pages 359-372, May.
    14. Woodard, Joshua, 2016. "Estimation of Insurance Deductible Demand under Endogenous Premium Rates," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 236151, Agricultural and Applied Economics Association.
    15. Motamed, Mesbah J., 2021. "Price-Yield Covariance Effects on Producers’ Risk Profile and Risk Response," 2021 Annual Meeting, August 1-3, Austin, Texas 314082, Agricultural and Applied Economics Association.
    16. Luckstead, Jeff & Devadoss, Stephen, 2016. "Implication of 2014 Farm Policies for Wheat Production," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235362, Agricultural and Applied Economics Association.
    17. Joshua D. Woodard & Jing Yi, 2020. "Estimation of Insurance Deductible Demand Under Endogenous Premium Rates," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 477-500, June.
    18. Jisang Yu & Daniel A. Sumner, 2018. "Effects of subsidized crop insurance on crop choices," Agricultural Economics, International Association of Agricultural Economists, vol. 49(4), pages 533-545, July.
    19. Du, Xiaodong & Hennessy, David & Feng, Hongli, 2014. "Tail Dependence is to be Expected Among Crop Yields," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 174315, Agricultural and Applied Economics Association.
    20. Yuyuan Che & Hongli Feng & David A. Hennessy, 2020. "Recency effects and participation at the extensive and intensive margins in the U.S. Federal Crop Insurance Program," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(1), pages 52-85, January.

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    More about this item

    JEL classification:

    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy
    • Q24 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Land

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