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Fair Value Of Whole-Farm And Crop-Specific Revenue Insurance

  • Hennessy, David A.
  • Saak, Alexander E.
  • Babcock, Bruce A.

The U.S. market in subsidized commodity revenue insurance contracts has expanded rapidly since 1996. By far the most prevalent contract forms are crop-specific, rather than the whole-farm design which has a better claim to being optimal. For an arbitrary acre allocation vector, this paper inquires into absolute and relative determinants of the actuarial costs of these forms. The actuarial value of whole-farm insurance increases under a particular characterization of >more systematic= risk, whereas the actuarial value of insurance through crop-specific contracts need not change. Upon fixing stochastic revenue interactions, we identify conditions such that the expected cost of revenue insurance via crop-specific contracts is increasing under a more dispersed vector of location-and-scale adjusted revenue guarantee parameters. Then we identify two precise requirements such that the actuarial values of the two contract forms converge. To give insights on the difference, fair premiums for whole-farm and crop-specific contracts are compared for typical farms in two states.

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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2003 Annual meeting, July 27-30, Montreal, Canada with number 21988.

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Date of creation: 2003
Date of revision:
Handle: RePEc:ags:aaea03:21988
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  1. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1995. "Budgetary and Resource Allocation Effects of Revenue Assurance: Summary of Results, The," Center for Agricultural and Rural Development (CARD) Publications 95-bp7, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  2. Bruce A. Babcock & David A. Hennessy, 1996. "Input Demand under Yield and Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 416-427.
  3. Marco Scarsini & Alfred Muller, 2000. "Some remarks on the supermodular order," Post-Print hal-00540239, HAL.
  4. Athey, Susan, 2002. "Monotone Comparative Statics Under Uncertainty," Scholarly Articles 3372263, Harvard University Department of Economics.
  5. Olivier Mahul & Brian D. Wright, 2003. "Designing Optimal Crop Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(3), pages 580-589.
  6. Lapan, Harvey E. & Hennessy, David A., 2002. "Symmetry and Order in the Portfolio Allocation Problem," Staff General Research Papers 5106, Iowa State University, Department of Economics.
  7. Jeffrey R. Stokes & William I. Nayda & Burton C. English, 1997. "The Pricing of Revenue Assurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 439-451.
  8. James A. Vercammen, 2000. "Constrained Efficient Contracts for Area Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 856-864.
  9. Stokes, Jeffrey R., 2000. "A Derivative Security Approach To Setting Crop Revenue Coverage Insurance Premiums," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(01), July.
  10. Hennessy, David A., 2000. "Corporate Spin-Offs, Bankruptcy, Investment, and the Value of Debt," Staff General Research Papers 1898, Iowa State University, Department of Economics.
  11. Campbell, Rachel & Huisman, Ronald & Koedijk, Kees, 2001. "Optimal portfolio selection in a Value-at-Risk framework," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1789-1804, September.
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