IDEAS home Printed from
   My bibliography  Save this paper

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


  • Breustedt, Gunnar
  • Larson, Donald F.


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

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    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.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    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.

    More about this item


    Risk and Uncertainty;


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:iaae06:25552. 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). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.