Ex‐post moral hazard in prevented planting

Abstract

This article analyzes the existence of moral hazard in prevented planting (PP) in the United States. The PP provision is defined as the "failure to plant an insured crop by the final planting date due to adverse events." If the farmer decides not to plant a crop, the farmer receives a PP indemnity. Late planting (LP) is an option for farmers to plant a crop while maintaining crop insurance after the final planting date. Crop insurance may alter farmers' behavior in selecting PP or LP and could increase the likelihood of PP claims even though farmers can choose LP. This study finds evidence that a farmer with higher insurance coverage tends to choose PP more often (ex-post moral hazard). Spatial panel models attest to the existence of the ex-post moral hazard in PP empirically. Empirical results show that the PP ratio has a positive relationship with insurance coverage in the case of corn production.JEL classifications: D81, G22, Q12, Q14

Analyzing corn and cotton producers optimal prevented planting decision on moral hazard

“…Accepting the full prevented planting indemnity payment over the option of planting uninsured soybean and receiving the 35% prevented planting indemnity payment would suggest the presence of moral hazard since the net returns from this option were more likely to be higher than the full prevented planting indemnity payment. The likelihood of the expected net returns from the three prevented planting options requiring a crop to be planted being greater than the full prevented planting indemnity payment decreased as RP coverage increased, which is what Kim and Kim (2018) observed.…”

“…We define ex‐post moral hazard in prevented planting as choosing the full prevented planting indemnity payment, even though other options are expected to have higher net returns. This study, like Kim and Kim's (2018), can only evaluate the likelihood of ex‐post moral hazard existing in the prevented planting provision. Therefore, we compared the expected net returns for the full prevented planting indemnity payment, which is shown in Table 4, to the distribution of the simulated net returns of the three options requiring a crop to be planted (i.e., late planting, 35% prevented planting and uninsured soybean, and insured soybean).…”

“…We define ex‐post moral hazard in prevented planting slightly different than Kim and Kim (2018) and Boyer and Smith (2019). Ex‐post moral hazard exists when an insured producer chooses to not produce a crop and take the full prevented planting indemnity payment, despite planting during the late planting period or switching crops being more profitable options.…”

“…Typically, moral hazard in crop insurance occurs before the loss has happened (i.e., ex ante moral hazard), such as under‐applying chemicals and fertilizer during the production year, knowing they are covered from losses (Coble, Knight, Pope, & Williams, 1997; Horowitz & Lichtenberg, 1993). Moral hazard in prevented planting differs from these studies because a producer's decision to continue with planting during the late planting period or not produce a crop occurs after the loss, which is ex‐post moral hazard (Kim & Kim, 2018; Rees & Wambach, 2008). Kim and Kim (2018) defined ex‐post moral hazard in prevented planting as selecting the full prevented planting payment over late planting or planting any second crop.…”

“…Moral hazard in prevented planting differs from these studies because a producer's decision to continue with planting during the late planting period or not produce a crop occurs after the loss, which is ex‐post moral hazard (Kim & Kim, 2018; Rees & Wambach, 2008). Kim and Kim (2018) defined ex‐post moral hazard in prevented planting as selecting the full prevented planting payment over late planting or planting any second crop. They found the current prevented planting provision was likely encouraging corn producers to abandon their crop and take the prevented planting indemnity payment, promoting ex‐post moral hazard.…”