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Marketing Contracts and Crop Insurance

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  • Xiaoxue Du
  • Jennifer Ifft
  • Liang Lu
  • David Zilberman

Abstract

Contracts between farmers and intermediaries and crop insurers are important means for farmers to mitigate risks in modern U.S. agriculture. In this paper, we investigate the effect of crop insurance enrollment on contract terms and farmers’ participation in marketing contracts. Following Ligon (2003), we set up a mechanism design framework to demonstrate an intermediary's contract design problem, where farmers are assumed to be utility maximizing agents. We depict farmers’ optimal choices of insurance coverage using the specification developed by Babcock (2012). Our model shows that improved terms of crop insurance (lower premiums, higher subsidies) make contracts less appealing to farmers as mechanisms for mitigating risk. Therefore, intermediaries may revise their contract offers so that they are more attractive. However, improvements in contract terms are limited by their cost to the intermediaries and will not lead to expanded participation in contracts.

Suggested Citation

  • Xiaoxue Du & Jennifer Ifft & Liang Lu & David Zilberman, 2015. "Marketing Contracts and Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 97(5), pages 1360-1370.
    • Handle: RePEc:oup:ajagec:v:97:y:2015:i:5:p:1360-1370.
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    File URL: http://hdl.handle.net/10.1093/ajae/aav024
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    Cited by:

    1. Gohin, Alex, 2017. "Macroeconomic impacts of the U.S. farm policy: a second best assessment," Conference papers 332819, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    2. McKendree, Melissa G.S. & Tonsor, Glynn T. & Schulz, Lee L., 2021. "Management of Multiple Sources of Risk in Livestock Production," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 53(1), pages 75-93, February.
    3. Alexandre Gohin, 2019. "General Equilibrium Modelling of the Insurance Industry: U.S. Crop Insurance," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 4(2), pages 108-145, December.
    4. Gohin, Alexandre, 2018. "Lessons from the U.S. risk management instruments for the future CAP," 162nd Seminar, April 26-27, 2018, Budapest, Hungary 271965, European Association of Agricultural Economists.

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