Risk Sharing and Incentives with Crop Insurance and External Equity Financing
Farmers have increasingly been procuring external equity financing through either written or verbal business arrangements. Passage of the Agricultural Risk Protection Act in 2000 has resulted in widespread adoption of crop insurance among farmers. Crop insurance changes farmers’ production decisions, so that investors providing external equity may want to adjust the equity financing contract to account for these changes. This paper uses a principal-agent model to determine optimal risk sharing and incentives under crop insurance and external equity financing. Results show that with the introduction of crop insurance, the investor’s optimal equity financing contract requires that the farmer bears more risk in order to have the incentive to work hard.
|Date of creation:||2003|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.agfin.ifas.ufl.edu/|
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.:
- Douglas W. Allen & Dean Lueck, 2004. "The Nature of the Farm: Contracts, Risk, and Organization in Agriculture," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262511851, June.
- 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.
- Bruce A. Babcock & Joseph A. Herriges, 1994. "Input Demand Under Yield and Revenue Insurance," Center for Agricultural and Rural Development (CARD) Publications 94-wp127, Center for Agricultural and Rural Development (CARD) at Iowa State University.
- Babcock, Bruce A. & Hennessy, David A., 1996. "Input Demand Under Yield and Revenue Insurance," Staff General Research Papers 794, Iowa State University, Department of Economics.
- Vincent H. Smith & Barry K. Goodwin, 1996. "Crop Insurance, Moral Hazard, and Agricultural Chemical Use," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 428-438.
- Leatham, David J. & McCarl, Bruce A. & Richardson, James W., 1987. "Implications Of Crop Insurance For Farmers And Lenders," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 19(02), December.
When requesting a correction, please mention this item's handle: RePEc:ags:nc2003:132523. 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.