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Designing Optimal Crop Revenue Insurance

  • Mahul, Olivier
  • Wright, Brian D.

The optimal crop revenue insurance contract is designed from recent developments in the theory of insurance economics under incomplete markets. The message is two-fold. Firstly, when the indemnity schedule is contingent on individual price and individual yield, the optimal contract depends only on the individual gross revenue. Secondly, this policy is shown to fail if the indemnity function is based on aggregate price and/or aggregate yield. A closed-form solution, in which basis risks are ignored, is proposed. It differs from actual revenue insurance programs proposed to the U.S. farmers. When insurance and capital markets are unbiased, it can be replicated with existing crop yield and revenue insurance policies and hedging contracts if the decision variables are not constrained. The impact of yield and price basis risks on the form of the optimal crop revenue insurance contract is examined and a closed-form solution is derived.

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File URL: http://purl.umn.edu/21729
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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2000 Annual meeting, July 30-August 2, Tampa, FL with number 21729.

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Date of creation: 2000
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Handle: RePEc:ags:aaea00:21729
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  1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  2. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1995. "Budgetary and Resource Allocation Effects of Revenue Assurance," Center for Agricultural and Rural Development (CARD) Publications 95-wp130, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  3. Olivier Mahul, 1999. "Optimum Area Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(1), pages 75-82.
  4. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economics Reports 34081, United States Department of Agriculture, Economic Research Service.
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