Crop insurance demand in wheat production: focusing on yield gaps and asymmetric information

This paper presents analyses of yield gaps in the context of crop insurance, and the possible influence of asymmetric information in the decision of a farmer to contract insurance

Alba Castañeda-Vera; Antonio Saa-Requejo; Inés Mínguez; Alberto Garrido

2017

Scholarcy highlights

  • Developing efficient agricultural insurance requires overcoming a number of market imperfections and combating asymmetric information
  • Analysis of yield gaps were conducted in the context of crop insurance and used to build an indicator of asymmetric information
  • The analysis includes simulated yield using a validated crop model, CERES-Wheat previously selected among others, whose suitability to estimate actual risk when no historical data are available was assessed
  • Asymmetric information occurs when insured farmers have more information than the insurer about their actual risk and behaviour, and results in two behavioural responses: moral hazard and adverse selection
  • A novel method to measure asymmetric information was designed based on yield gaps and applied to wheat insurance in the region of Castilla y León
  • In the case of wheat insurance in Castilla y León, and for option Extended, most of the insured area was gathered by Module 2, despite subsidies in Module 1 being higher than in Module 2
  • This result suggests that, as expected, it is more accurate to calibrate insurance parameters based on actual reported yields instead of attainable yields, and on historical data rather than using crop models

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