Journal Article

Adverse Selection in Crop Insurance: Actuarial and Asymmetric Information Incentives

Richard E. Just, Linda Calvin and John Quiggin

in American Journal of Agricultural Economics

Published on behalf of Agricultural and Applied Economics Association

Volume 81, issue 4, pages 834-849
Published in print November 1999 | ISSN: 0002-9092
Published online November 1999 | e-ISSN: 1467-8276 | DOI: http://dx.doi.org/10.2307/1244328
Adverse Selection in Crop Insurance: Actuarial and Asymmetric Information Incentives

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Adverse selection is often blamed for crop insurance indemnities exceeding premiums plus subsidies. However, nationwide empirical evidence has been lacking or based on inadequate county-level data. This article uses nationwide farm-level data on corn and soybeans to decompose incentives for participation in U.S. multiple peril crop insurance into a risk-aversion incentive (the conventional justification for insurance), an actuarial or subsidy incentive (reflecting government subsidization), and an asymmetric information incentive (which reflects farmers' information advantage). Results show that the risk-aversion incentive is small. Farmers participate in crop insurance primarily to receive the subsidy or because of adverse selection possibilities.

Keywords: actuarial incentives; adverse selection; asymmetric information; crop insurance; G220; Q120; Q140

Journal Article.  0 words. 

Subjects: Agricultural Economics ; Insurance

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