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U.S. Farmers’ Insurance Choices under Expected Utility Theory and Cumulative Prospect Theory

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  • Bulut, Harun

Abstract

Towards explaining regional differences in U.S. farmers’ crop insurance choices, we propose a budget heuristic effect within the standard Expected Utility Theory (EUT) framework and conduct theoretical and simulation analyses. We also disentangle the effects of various aspects the cumulative prospect theory (CPT) framework in a separate simulation analysis.

Suggested Citation

  • Bulut, Harun, 2016. "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.
  • Handle: RePEc:ags:aaea16:236019
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    File URL: http://ageconsearch.umn.edu/record/236019/files/2016%20May%2025-US%20Farmers%20Insurance%20Choices--2016%20AAEA--Final%20with%20Cover%20Page.pdf
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    References listed on IDEAS

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    1. Richard H. Thaler, 2008. "Commentary—Mental Accounting and Consumer Choice: Anatomy of a Failure," Marketing Science, INFORMS, vol. 27(1), pages 12-14, 01-02.
    2. Bruce A. Babcock, 2015. "Using Cumulative Prospect Theory to Explain Anomalous Crop Insurance Coverage Choice," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 97(5), pages 1371-1384.
    3. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    4. Robert G. Chambers & John Quiggin, 2002. "Optimal Producer Behavior in the Presence of Area-Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(2), pages 320-334.
    5. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-648, July-Aug..
    6. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    7. Giancarlo Moschini & Daniele Moro & Richard D. Green, 1994. "Maintaining and Testing Separability in Demand Systems," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(1), pages 61-73.
    8. 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.
    9. Heerman, Kari E.R. & Cooper, Joseph & Johansson, Robert & Worth, Thomas, 2016. "Farmer response to crop insurance incentives under heterogeneous risk-management strategies," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235967, Agricultural and Applied Economics Association.
    10. Alexis Louaas & Pierre Picard, 2014. "Optimal Insurance For Catastrophic Risk: Theory And Application To Nuclear Corporate Liability," Working Papers hal-01097897, HAL.
    11. repec:ags:jlaare:264070 is not listed on IDEAS
    12. Harun Bulut & Keith J. Collins & Thomas P. Zacharias, 2012. "Optimal Coverage Level Choice with Individual and Area Insurance Plans," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(4), pages 1013-1023.
    13. Harun Bulut & Keith J. Collins, 2014. "Designing farm supplemental revenue coverage options on top of crop insurance coverage," Agricultural Finance Review, Emerald Group Publishing, vol. 74(3), pages 397-426, August.
    14. Barry K. Goodwin, 1993. "An Empirical Analysis of the Demand for Multiple Peril Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(2), pages 425-434.
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    Cited by:

    1. Shin, Soye, 2018. "Better understanding of Demand for Weather Index Insurance among Smallholder Farmers under Prospect Theory," 2018 Annual Meeting, August 5-7, Washington, D.C. 274477, Agricultural and Applied Economics Association.

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