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Mutual Crop Insurance and Moral Hazard: The Case of Mexican Fondos

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  • Breustedt, Gunnar
  • Larson, Donald F.

Abstract

Insuring against crop yield risk is an important task in rural microfinance because such an insurance may improve access to capital for smallholders by substituting for collaterals. However, agricultural crop yield risk is even hard to mitigate in developed countries due to problems of asymmetric information. In this paper we investigate theoretically and empirically whether special institutional rules in Mexican mutual crop insurance groups, called Fondos, can reduce problems of moral hazard. After presenting this case of a multiple peril crop insurance, we model a dynamic stochastic control problem extending it to a moral hazard game. We show from a theoretical point of view that institutions in the Fondos system have impact on the farmers' behaviour to avoid or reduce losses. Thus, if farmers can influence the level of losses or the loss probability technologically the institutions can be used to restrict the incentives for moral hazard. In the empirical analysis - by means of panel logistic random effects as well as fixed effects regressions - we show that a certain rule reduces the loss probability in a Fondo. Thus, we have empirically shown both that an institution of the Fondos can reduce moral hazard and that moral hazard exists in this insurance system of a multiple peril crop insurance as in common crop yield risk insurance schemes. From a political perspective, our analysis supports the view that this system of Mexican Fondos may serve as a blueprint for crop insurance schemes in developing countries.

Suggested Citation

  • Breustedt, Gunnar & Larson, Donald F., 2006. "Mutual Crop Insurance and Moral Hazard: The Case of Mexican Fondos," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25552, International Association of Agricultural Economists.
  • Handle: RePEc:ags:iaae06:25552
    DOI: 10.22004/ag.econ.25552
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    File URL: http://ageconsearch.umn.edu/record/25552/files/cp061026.pdf
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    References listed on IDEAS

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    1. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
    2. Moschini, Giancarlo & Hennessy, David A., 2001. "Uncertainty, risk aversion, and risk management for agricultural producers," Handbook of Agricultural Economics, in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 2, pages 88-153, Elsevier.
    3. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 767-820, June.
    4. 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.
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    Cited by:

    1. Heidelbach, Olaf, 2007. "Efficiency of selected risk management instruments: An empirical analysis of risk reduction in Kazakhstani crop production," Studies on the Agricultural and Food Sector in Transition Economies, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), volume 40, number 92323.

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    Keywords

    Risk and Uncertainty;

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