A Two Stage Model of the Demand For Specialty Crop Insurance
Proposals for reform of the federal multiple-peril crop insurance program for specialty crops seek to change fees for catastrophic (CAT) insurance from a nominal fifty-dollar per contract registration fee to an actuarially sound premium. Growers argue that this would cause a significant reduction in participation rates, thus impeding the program's goals of eventually obviating the need for ad hoc disaster payments and worsening the actuarial soundness of the program. The key policy issue is, therefore, empirical one - whether the demand for specialty crop insurance is elastic or inelastic. Previous studies of this issue using either grower or county-level field crop data typically treat the participation problem as either a discrete insure / don't insure decision or aggregate these decisions to a continuous participation rate problem. However, a grower's problem is more realistically cast as one of simultaneously making a coverage level / insurance participation decision. Because the issue at hand considers a significant price increase for only one coverage level (50%), differentiating between these decisions is necessary both from an analytical and econometric standpoint. To model this decision, the paper develops a two-stage estimation procedure based on Lee's multinomial logit-OLS selection framework. This method is applied to a county-level panel data set consisting of eleven years of the eleven largest grape-growing counties in California. Results show that growers choose among coverage levels based upon expected net premiums and the variance of these returns, as well as the first two moments of expected market returns. At the participation-level, the mean and variance of indemnities are also important, as are several variables measuring the extent of self-insurance, such as farm size, enterprise diversity, or farm income. The results also show that the elasticity of 50% coverage insurance is elastic, suggesting that premium increases may indeed worsen the actuarial soundness of the program. These increases will also cause a significant adjustment of growers among coverage levels.
|Date of creation:||1998|
|Date of revision:|
|Contact details of provider:|| Phone: (480) 727-1585|
Web page: http://www.east.asu.edu/msabr
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Niewuwoudt, W.L. & Bullock, J. Bruce, 1985. "The Demand for Crop Insurance," 1985 Conference, August 26-September 4, 1985, MÃ¡laga, Spain 183028, International Association of Agricultural Economists.
- Vincent H. Smith & Alan E. Baquet, 1996. "The Demand for Multiple Peril Crop Insurance: Evidence from Montana Wheat Farms," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(1), pages 189-201.
- Lee, Lung-Fei, 1983. "Generalized Econometric Models with Selectivity," Econometrica, Econometric Society, vol. 51(2), pages 507-12, March.
- Heckman, James J, 1979.
"Sample Selection Bias as a Specification Error,"
Econometric Society, vol. 47(1), pages 153-61, January.
- Just, Richard E. & Calvin, Linda & Quiggin, John, 1993.
"Adverse Selection in Crop Insurance: Actuarial and Asymmetric Information Incentives,"
197809, University of Maryland, Department of Agricultural and Resource Economics.
- Richard E. Just & Linda Calvin & John Quiggin, 1999. "Adverse Selection in Crop Insurance: Actuarial and Asymmetric Information Incentives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 834-849.
- Hanemann, W Michael, 1984. "Discrete-Continuous Models of Consumer Demand," Econometrica, Econometric Society, vol. 52(3), pages 541-61, May.
- Pradeep K. Chintagunta, 1993. "Investigating Purchase Incidence, Brand Choice and Purchase Quantity Decisions of Households," Marketing Science, INFORMS, vol. 12(2), pages 184-208.
- Dubin, Jeffrey A & McFadden, Daniel L, 1984. "An Econometric Analysis of Residential Electric Appliance Holdings and Consumption," Econometrica, Econometric Society, vol. 52(2), pages 345-62, March.
- Keith H. Coble & Thomas O. Knight & Rulon D. Pope & Jeffery R. Williams, 1996. "Modeling Farm-Level Crop Insurance Demand with Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 439-447.
- Barry K. Goodwin & Alan P. Ker, 1998. "Nonparametric Estimation of Crop Yield Distributions: Implications for Rating Group-Risk Crop Insurance Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 139-153.
- Goodwin, Barry K., 1994. "Premium Rate Determination In The Federal Crop Insurance Program: What Do Averages Have To Say About Risk?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(02), December.
When requesting a correction, please mention this item's handle: RePEc:ags:asumwp:28546. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If references are entirely missing, you can add them using this form.