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The impact of farmers' risk preferences on the design of an individual yield crop insurance

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  • Laurent Piet
  • Douadia Bougherara

Abstract

Kahneman and Tversky's Cumulative Prospect Theory (CPT) has proved to be better suited for representing risk preferences than von Neumann and Morgenstern's Expected Utility Theory (EUT). We argue that neglecting this may explain to some extent why farmers do not contract crop insurance as much as they are expected to. We model the decision to contract an individual yield crop insurance for a sample of 186 French farmers. We show that 21% of the farmers who would be expected to contract assuming that their preferences are EUT, would actually not do so if their true preferences were in fact CPT.

Suggested Citation

  • Laurent Piet & Douadia Bougherara, 2016. "The impact of farmers' risk preferences on the design of an individual yield crop insurance," Working Papers SMART - LERECO 16-03, INRA UMR SMART-LERECO.
  • Handle: RePEc:rae:wpaper:201603
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    References listed on IDEAS

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    1. Vincent H. Smith & Joseph W. Glauber, 2012. "Agricultural Insurance in Developed Countries: Where Have We Been and Where Are We Going?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 34(3), pages 363-390.
    2. Jerry R. Skees & J. Roy Black & Barry J. Barnett, 1997. "Designing and Rating an Area Yield Crop Insurance Contract," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 430-438.
    3. Douadia Bougherara & Xavier Gassmann & Laurent Piet, 2011. "A structural estimation of French farmers’ risk preferences: an artefactual field experiment," Working Papers SMART - LERECO 11-06, INRA UMR SMART-LERECO.
    4. repec:feb:artefa:0092 is not listed on IDEAS
    5. Quang Nguyen & Colin Camerer & Tomomi Tanaka, 2010. "Risk and Time Preferences Linking Experimental and Household Data from Vietnam," Post-Print halshs-00547090, HAL.
    6. Galarza, Francisco, 2009. "Choices under Risk in Rural Peru," MPRA Paper 17708, University Library of Munich, Germany.
    7. Smith, Vincent H. & Chouinard, Hayley H. & Baquet, Alan E., 1994. "Almost Ideal Area Yield Crop Insurance Contracts," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 23(1), April.
    8. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    9. John C. Quiggin & Giannis Karagiannis & J. Stanton, 1993. "Crop Insurance And Crop Production: An Empirical Study Of Moral Hazard And Adverse Selection," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 37(2), pages 95-113, August.
    10. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    11. Robert G. Chambers & John Quiggin, 2002. "Optimal Producer Behavior in the Presence of Area-Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(2), pages 320-334.
    12. Tomomi Tanaka & Colin F. Camerer & Quang Nguyen, 2010. "Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam," American Economic Review, American Economic Association, vol. 100(1), pages 557-571, March.
    13. 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.
    14. Jean-Marc Bourgeon & Robert G. Chambers, 2003. "Optimal Area-Yield Crop Insurance Reconsidered," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(3), pages 590-604.
    15. Coelho, Luís Alberto Godinho & Pires, Cesaltina Maria Pacheco & Dionísio, Andreia Teixeira & Serrão, Amílcar Joaquim da Conceição, 2012. "The impact of CAP policy in farmer's behavior – A modeling approach using the Cumulative Prospect Theory," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 81-98.
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    More about this item

    Keywords

    yield; crop insurance; cumulative prospect theory; premium subsidy; France;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q10 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - General
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy

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