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A Natural Resource Theory of U.S. Crop Insurance Contract Choice

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  • Du, Xiaodong
  • Hennessy, David A.
  • Feng, Hongli

Abstract

A large variety of subsidized crop insurance products are available to U.S. crop growers. Distinct and perhaps puzzling patterns in the choices of insurance products and coverage levels can be discerned. Where production conditions are better and yields are less risky then (a) higher insurance coverage levels are chosen; and (b) revenue insurance is preferred over yield insurance. Also, (c) the extent of preference for revenue insurance is stronger in more productive areas. Assuming, as many do, that growers seek to maximize subsidy transfers, point (a) can be explained by the interaction between yield technology and natural resource endowments. Points (b) and (c) can be explained by location in conjunction with the "natural hedge" and a contract design bias in how revenue insurance guarantees are computed. Empirical study of Risk Management Agency data on corn, soybean, and wheat yields, and insurance contract choices lend support to our model inferences.

Suggested Citation

  • Du, Xiaodong & Hennessy, David A. & Feng, Hongli, 2013. "A Natural Resource Theory of U.S. Crop Insurance Contract Choice," Staff General Research Papers Archive 36751, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:36751
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    Cited by:

    1. Holderieath, Jason, 2014. "Impact of Increased Crop Insurance Enrollment on Cropping of Environmentally Sensitive Land," 2014 AAEA: Crop Insurance and the 2014 Farm Bill Symposium: Implementing Change in U.S. Agricultural Policy, October 8-9, Louisville, KY 184269, Agricultural and Applied Economics Association.
    2. Feng, Hongli & Du, Xiaodong & Hennessy, David A., 2013. "An Analysis of Farmers' Insurance Choices and Federal Crop Insurance Subsidies," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151284, Agricultural and Applied Economics Association.
    3. Luckstead, Jeff & Devadoss, Stephen, 2016. "Implication of 2014 Farm Policies for Wheat Production," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235362, Agricultural and Applied Economics Association.
    4. repec:oup:ajagec:v:99:y:2017:i:3:p:732-756. is not listed on IDEAS
    5. Du, Xiaodong & Hennessy, David & Feng, Hongli, 2014. "Tail Dependence is to be Expected Among Crop Yields," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 174315, Agricultural and Applied Economics Association.
    6. Xiaodong Du & Hongli Feng & David A. Hennessy, 2017. "Rationality of Choices in Subsidized Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(3), pages 732-756.
    7. Kusumastuti, Ratih Dyah & Donk, Dirk Pieter van & Teunter, Ruud, 2016. "Crop-related harvesting and processing planning: a review," International Journal of Production Economics, Elsevier, vol. 174(C), pages 76-92.
    8. Bulut, Harun, 2016. "U.S. Farmers’ Insurance Choices under Expected Utility Theory and Cumulative Prospect Theory," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 236019, Agricultural and Applied Economics Association.
    9. Xiaodong Du & David A. Hennessy & Hongli Feng, 2015. "Land Resilience and Tail Dependence among Crop Yield Distributions," Center for Agricultural and Rural Development (CARD) Publications 15-wp556, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    10. Woodard, Joshua, 2016. "Estimation of Insurance Deductible Demand under Endogenous Premium Rates," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 236151, Agricultural and Applied Economics Association.

    More about this item

    Keywords

    agricultural policy; contract choice; crop insurance; land use; yield risk measurement.;

    JEL classification:

    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy
    • Q24 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Land

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