Further Toward a Theory of Agricultural Insurance

Abstract

The economic theory of contracts is applied to agricultural insurance to show that, given full information, Pareto‐optimal insurance contracts are actuarially fair, provide full coverage, and differ for each individual. The information problems of moral hazard and adverse selection prevent Pareto optimality from being attained. Several “second‐best” solutions to these problems are applied to agricultural insurance. It is shown that information collection and the application of contract design principles are “second‐best” solutions which may achieve the benefits of insurance at less cost than the current practice of public subsidies.

Factors Influencing Adoption of Livestock Insurance by Commercial Dairy Farmers in Three Zobatat of Eritrea

“…Moral hazard, which also arises from asymmetric information, refers to an individual's change in behaviour after having taken out an insurance policy in a way that increases the probability of receiving an indemnity payment (Miranda and Glauber, 1997). Moral hazard problems occur because the insured can take actions that cannot be observed by the insurer but which affect the probability of losses (Nelson and Loehman, 1987). Asymmetric information problems (particularly adverse selection and moral hazard) are a major cause of market failure in crop insurance (Nieuwoudt, 2000).…”

Agriculture and Adaptation to Climate Change: The Role of Insurance in Risk Management: The Case of Colombia

“…The country's particular conditions especially raise information, monitoring, and administrative costs. 4 Theoretically, when the insurer is risk neutral and there are no insurance administrative costs, agricultural risks are insurable (Nelson and Loehman, 1987). But if administrative costs are positive, we would expect coverage to be less than full (Cutler and Zeckhauser, 2004).…”

The economics of agricultural development: what have we learned?

“…By the early 1980's, however, it had become apparent that crop insurance was not a particularly effective instrument for promoting agricultural development, in addition, was very costly. A new consensus emerged that crop insurance was good in theory but too costly in practice [44][45][46].…”