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Using The Spatial Statistics Approach To Analyze Yield Risk Pooling In The Us

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  • Wang, H. Holly
  • Zhang, Hao

Abstract

Risk theory tells us if an insurer can effectively pool a large number of individuals to reduce the total risk, he then can provide the insurance by charging a premium close to the actuarially fair rate. There is, however, a common belief that the risk can be effectively pooled only when the random loss is independent, so that crop insurance markets cannot survive without government subsidy because crop yields are not independent among growers. In this paper, we take a a spatial statistics approach to examine the effectiveness of risk pooling for crop insurance under correlation. We develop a method for evaluating the effectiveness of risk pooling under correlation and apply the method to three major crops in the US: wheat, soybeans and corn. The empirical study shows that yields for the three crops present zero or negative correlation when two counties are far apart, which complies with a weaker condition than independence, finite-range positive dependency. The results show that effective risk pooling is possible and reveal a high possibility of a private crop insurance market in the US.

Suggested Citation

  • Wang, H. Holly & Zhang, Hao, 2002. "Using The Spatial Statistics Approach To Analyze Yield Risk Pooling In The Us," 2002 Annual meeting, July 28-31, Long Beach, CA 19633, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea02:19633
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    File URL: http://purl.umn.edu/19633
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    References listed on IDEAS

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    1. Thomas O. Knight & Keith H. Coble, 1997. "Survey of U.S. Multiple Peril Crop Insurance Literature Since 1980," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 19(1), pages 128-156.
    2. Roberts, Roland K. & English, Burton C. & Mahajanashetti, S.B., 2000. "Evaluating The Returns To Variable Rate Nitrogen Application," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(01), April.
    3. Skees, Jerry R. & Harwood, Joy & Somwaru, Agapi & Perry, Janet, 1998. "The Potential for Revenue Insurance Policies in the South," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 30(01), pages 47-61, July.
    4. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1024-1034.
    5. Jerry R. Skees & J. Roy Black & Barry J. Barnett, 1997. "Designing and Rating an Area Yield Crop Insurance Contract," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 430-438.
    6. Skees, Jerry R. & Harwood, Joy L. & Somwaru, Agapi & Perry, Janet E., 1998. "The Potential For Revenue Insurance Policies In The South," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 30(01), July.
    7. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1024-1034.
    8. Steven D. Hanson & Robert J. Myers & J. Roy Black, 1998. "The Effects of Crop Yield Insurance Designs on Farmer Participation and Welfare," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(4), pages 806-820.
    9. Mario J. Miranda & Joseph W. Glauber, 1997. "Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 206-215.
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    Keywords

    Risk and Uncertainty;

    Statistics

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