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Three essays on agricultural risk and insurance

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  • Zhang, Li
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    The general theme of this dissertation is agricultural risk and insurance in the United States. Chapter 2 examines welfare effects of the 2002 farm bill programs and yield insurance as well as their impacts on acreage decision of a representative Iowa farmer. Instead of measuring welfare using expected utility to capture farmers' preferences over risky alternatives, we apply recent advances in decision theory and use prospect theory to measure welfare changes due to government programs. The results indicate that there is no policy distortion to farmers' acreage decisions and farmers' willingness to pay per dollar of program cost is greatest for crop insurance. Given that farmers have crop insurance, the willingness to pay per dollar of program cost is much lower for loan deficiency payments, direct payments, and counter-cyclical payments. Chapter 3 develops a method for determining the aggregate risk of a book of business using hail insurance data. A spatial statistical approach is employed to measure the spatial correlation of hail loss cost. Monte Carlo simulation techniques are employed to simulate hail losses for a wide range of books of business. A regression model is estimated that captures the essence of the Monte Carlo simulation. This model can then be used to quickly estimate the degree of poolability of any given book of business. Chapter 4 turns to weather-based index contracts as alternative risk-management instruments in agriculture. A major concern associated with index contracts is basis risk. To address spatial basis risk, two spatial interpolation approaches, a geo-statistical approach and a Markov random field approach, are compared. The Markov random field approach is preferred because it has a smaller cross-validation prediction mean squared error. A temperature index insurance is presented based on interpolated data. The potential performance of the proposed index insurance is investigated through historical analysis in contract years 1980 to 2005.

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    File URL: http://lib.dr.iastate.edu/cgi/viewcontent.cgi?article=16857&context=rtd
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    Paper provided by Iowa State University, Department of Economics in its series ISU General Staff Papers with number 2008010108000016857.

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    Date of creation: 01 Jan 2008
    Handle: RePEc:isu:genstf:2008010108000016857
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    Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070

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    1. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1024-1034.
    2. Richards, Timothy J. & Manfredo, Mark R. & Sanders, Dwight R., 2004. "Pricing Weather Derivatives," Working Papers 28536, Arizona State University, Morrison School of Agribusiness and Resource Management.
    3. Jewson,Stephen & Brix,Anders, 2005. "Weather Derivative Valuation," Cambridge Books, Cambridge University Press, number 9780521843713, December.
    4. Paulson, Nicholas D. & Hart, Chad E., 2006. "A Spatial Approach to Addressing Weather Derivative Basis Risk: A Drought Insurance Example," 2006 Annual meeting, July 23-26, Long Beach, CA 21249, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1024-1034.
    6. Sean D. Campbell & Francis X. Diebold, 2005. "Weather Forecasting for Weather Derivatives," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 6-16, March.
    7. Martin, Steven W. & Barnett, Barry J. & Coble, Keith H., 2001. "Developing And Pricing Precipitation Insurance," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(01), July.
    8. Alfons Weersink & Szu-Hsuan Celia Chiang, 2006. "Pricing Weather Insurance with a Random Strike Price: The Ontario Ice-Wine Harvest," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(3), pages 696-709.
    9. Xiaohui Deng & Barry J. Barnett & Dmitry V. Vedenov & Joe W. West, 2007. "Hedging dairy production losses using weather-based index insurance," Agricultural Economics, International Association of Agricultural Economists, vol. 36(2), pages 271-280, March.
    10. Alexander Shapiro & Jos Berge, 2002. "Statistical inference of minimum rank factor analysis," Psychometrika, Springer;The Psychometric Society, vol. 67(1), pages 79-94, March.
    11. Robert G. Chambers, 1989. "Insurability and Moral Hazard in Agricultural Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(3), pages 604-616.
    12. Wolfram Schlenker & W. Michael Hanemann & Anthony C. Fisher, 2006. "The Impact of Global Warming on U.S. Agriculture: An Econometric Analysis of Optimal Growing Conditions," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 113-125, February.
    13. Skees, Jerry & Hazell, P. B. R. & Miranda, Mario, 1999. "New approaches to crop yield insurance in developing countries:," EPTD discussion papers 55, International Food Policy Research Institute (IFPRI).
    14. Barry K. Goodwin, 1995. "The Economics of Crop Insurance and Disaster Aid," Books, American Enterprise Institute, number 53374, September.
    15. David A. Hennessy, 1998. "The Production Effects of Agricultural Income Support Policies under Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 46-57.
    16. Vedenov, Dmitry V. & Barnett, Barry J., 2004. "Efficiency of Weather Derivatives as Primary Crop Insurance Instruments," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(03), December.
    17. Calum G. Turvey, 2001. "Weather Derivatives for Specific Event Risks in Agriculture," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 23(2), pages 333-351.
    18. Dwight R. Sanders, 2004. "Pricing Weather Derivatives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(4), pages 1005-1017.
    19. Jerry R. Skees & Michael R. Reed, 1986. "Rate Making for Farm-Level Crop Insurance: Implications for Adverse Selection," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 68(3), pages 653-659.
    20. Mario Miranda & Dmitry V. Vedenov, 2001. "Innovations in Agricultural and Natural Disaster Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 650-655.
    21. Carl H. Nelson & Edna T. Loehman, 1987. "Further Toward a Theory of Agricultural Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(3), pages 523-531.
    22. Jerry R. Skees & Barry J. Barnett, 1999. "Conceptual and Practical Considerations for Sharing Catastrophic/Systemic Risks," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 21(2), pages 424-441.
    23. John Duncan & Robert J. Myers, 2000. "Crop Insurance under Catastrophic Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 842-855.
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