nep-ias New Economics Papers
on Insurance Economics
Issue of 2015‒08‒07
thirteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Effects of Subsidized Crop Insurance on Crop Choices By Yu, Jisang
  2. Crop Insurance’s Role in Farm Solvency By Kuethe, Todd H.; Paulson, Nicholas; Schnitkey, Gary
  3. Moral Hazard in Prevented Planting and Late Planting By Kim, Taehoo; Kim, Man-Keun
  4. Impacts of Federal Crop Insurance on Land Use and Environmental Quality By Claassen, Roger; Langpap, Christian; Wu, JunJie
  5. Interlocking directorates and concentration in the Italian insurance market By Canofari Paolo; Di Bartolomeo Giovanni
  6. Evaluating the Impact of Proposed Farm Bill Programs with Crop Insurance for Southern Crops By Davis, Todd; Anderson, John A.; Smith, Nathan
  7. Geostatistics, Basis Risk, and Index Insurance By Norton, Michael; Boucher, Stephen; Verteramo Chiu, Leslie
  8. Adaptive Behavior of U.S. Farms to Climate and Risk By Sung, Jae-hoon; Miranowski, John A.
  9. Estimation of Yield Densities: A Bayesian Nonparametric Perspective By Wang, Yang; Annan, Francis
  10. Willingness to Pay for Insured Loans in Northern Ghana By Gallenstein, Richard; Mishra, Khushbu; Sam, Abdoul; Miranda, Mario
  11. Employer-Provided Health Insurance Benefit and the Employment Decisions of Documented and Undocumented Farm Workers By Luo, Tianyuan; Escalante, Cesar L.
  12. The Financial Market Consequences of Growing Awareness: The Case of Implied Volatiltiy Skew By Siddiqi, Hammad
  13. What We Don't Know Doesn't Hurt Us: Rational Inattention and the Permanent Income Hypothesis in General Equilibrium By Jun Nie; Gaowang Wang; Eric Young; Yulei Luo

  1. By: Yu, Jisang
    Abstract: This study focuses on how subsidized crop insurance affects the farm portfolio. Crop insurance programs may change the investment decision of farmers due to risk reduction or premium subsidies. First, actuarially fair insurance reduces the risk of farmers, holding expected return constant. Second, premium subsidies encourage farmers to purchase crop insurance and increases the expected return to the risky crop. Yet, outside of crop insurance, farmers have self-insurance mechanisms available, such as crop diversification. I derive conditions for when actuarially fair insurance and premium subsidies lead to more investment in the risky higher-return crop, while allowing for self-insurance. The effect of premium subsidies are decomposed into an encouragement (indirect) effect and a relative profitability (direct) effect. These effects are explained by the interaction between market insurance and self-insurance, and the interaction between a risky crop and a safe crop. I discuss each effect as a combination of a wealth effect and a substitution effect. The framework provides a novel view of the evaluation of subsidized crop insurance programs.
    Keywords: Crop Insurance, Premium Subsidy, Farm Policy, Agricultural Finance, Risk and Uncertainty,
    Date: 2015
  2. By: Kuethe, Todd H.; Paulson, Nicholas; Schnitkey, Gary
    Abstract: By design, crop insurance is well suited to cover temporary or short-term adverse financial conditions for America’s farms. Farmers purchase crop insurance annually to cover losses as a result of either adverse growing conditions or price declines. This study examines the degree to which crop insurance may support farmers’ ability to meet long-term financial obligations. We explore the link between crop insurance coverage and farm solvency using a panel of farm records from 1995 – 2014.
    Keywords: Agricultural Finance, Risk and Uncertainty,
    Date: 2015–05–27
  3. By: Kim, Taehoo; Kim, Man-Keun
    Abstract: This study examines the existence of moral hazard inherent in the choices of prevented planting (PP) and late planting (LP). The PP provision is defined as the “failure to plant an insured crop by the final planting date due to adverse events” such as excess moisture or drought. If the farmer decides not to plant the crop, (after appraised by an agency) the farmer receives a PP indemnity. LP is an option for the farmer to plant the crop and still maintain the crop insurance when the farmer fails to plant crop by the final planting date. However, by choosing LP option, the farmer has to lower the insurance coverage level depending on the LP date due to potential yield loss. Crop insurance may alter farmers’ decision choices in production in making the selection of PP or LP. In other words, crop insurance can increase the likelihood of PP claims even though farmers can choose LP. In particular, this paper seeks to find evidence that the farmer with higher insurance coverage would tend to choose PP statistically more often. In this case moral hazard would then be observed.
    Keywords: Crop Insurance, Moral hazard, Prevented Planting, Late Planting, Agricultural and Food Policy, Farm Management, Risk and Uncertainty, D81, G22, Q12, Q14,
    Date: 2015–07
  4. By: Claassen, Roger; Langpap, Christian; Wu, JunJie
    Abstract: This paper integrates economic and physical models to assess how federal crop revenue insurance programs might affect land use, cropping systems, and environmental quality in the U.S. Corn Belt region. The empirical framework includes econometric models that predict land conversion, crop choices, and crop rotations at the parcel-level based on expectation and variance of crop revenues, land quality, climate conditions, and physical characteristics at each site. The predictions are then combined with site-specific environmental production functions to determine the effect of revenue insurance on nitrate runoff and leaching, soil water and wind erosion, and carbon sequestration. Results suggest that crop insurance will have small impacts on conversions of non-cropland to cropland, and somewhat more significant impacts on crop choice. These changes in crop mix have small impacts on agricultural pollution.
    Keywords: Crop Insurance, Revenue Insurance, Crop Choice, Environmental Quality, Agricultural and Food Policy, Crop Production/Industries, Environmental Economics and Policy, Land Economics/Use, Risk and Uncertainty, Q18, Q28,
    Date: 2015
  5. By: Canofari Paolo; Di Bartolomeo Giovanni
    Date: 2015–05
  6. By: Davis, Todd; Anderson, John A.; Smith, Nathan
    Abstract: A five-year stochastic model of proposed House and Senate farm bill programs interacting with crop insurance was used to simulate distributions of per acre net revenue for Arkansas rice, Texas cotton, and Georgia peanuts. Certainty equivalents were used to analyze the effect of risk aversion on preferred risk management strategies.
    Keywords: Farm Management, Risk Management, Agricultural Policy, Agricultural and Food Policy, Farm Management, Risk and Uncertainty,
    Date: 2014
  7. By: Norton, Michael; Boucher, Stephen; Verteramo Chiu, Leslie
    Abstract: This paper describes the application of geostatistics to weather index insurance in order to systematically analyze spatial basis risk inherent in index insurance contracts. The notion of spatial autocorrelation is in general overlooked by index insurance practitioners, but has profound implications for the effectiveness of the insurance offered. The analysis shows that it is possible to oer contracts from multiple weather stations to a single farmer, and that doing so will likely reduce the basis risk from a single contract. The two major implications of the paper are 1) that index insurance should be offered in more flexible contracts that allow farmers to hedge their production according to their perceptions of basis risk and their appetites for risk, and 2) the tradeoff between local (yield) correlation and spatial correlation needs to be more carefully considered, as it may even be better to oer contracts with poor yield correlation if they can include more spatial coverage.
    Keywords: Risk, Insurance, Geostatistics, Spatial Statistics, Weather, Hedging, Research Methods/ Statistical Methods, Risk and Uncertainty,
    Date: 2015
  8. By: Sung, Jae-hoon; Miranowski, John A.
    Abstract: We analyze the eects of climate conditions and crop insurance on farm-level land allocation decisions among corn, soybeans, winter wheat, and hay in 10 Midwest states. Based on ARMS data, we estimate farmers' land allocation equations that control for market conditions, climate and soil variables, and insurance. A multivariate sample selection model is used for estimation. We nd that: 1) benecial heat has positive eects on corn and soybean acreage but negative eects on winter wheat acreage, 2) excessive heat has negative eects on corn and winter wheat acreage but have positive eects on soybean acreage, 3) an increase in precipitation by 1% increases corn acreage by 0.6% but decrease soybean and winter wheat acreage by 1.0% and 1.6%, 4) soybean acreage is more sensitive to summer drought, and 5) crop insurance alters farmers land allocation.
    Keywords: Cropping pattern, climate change, crop insurance, ARMS., Land Economics/Use, Q54, Q18, Q15, Q12.,
    Date: 2015–07–28
  9. By: Wang, Yang; Annan, Francis
    Abstract: The pricing of crop insurance products hinges crucially on the accurate estimation of the underlying yield densities. Multiple estimation methods have already been examined in the literature, but the need for other potential candidates remains essential. Here we propose and examine a Bayesian nonparametric model which is based on Dirichlet processes for yield estimation. We deploy our proposed model for the empirical estimation of county level yield data for Cotton from Texas. Next, we examine the implications of our modeling framework on the pricing of the Group Risk Plan (GRP) insurance compared to a nonparametric Kernel-type model.
    Keywords: Crop Insurance, Bayesian nonparametrics, Dirichlet processes, Yield Density, Research Methods/ Statistical Methods, Risk and Uncertainty, C11, Q18,
    Date: 2015
  10. By: Gallenstein, Richard; Mishra, Khushbu; Sam, Abdoul; Miranda, Mario
    Abstract: Index insurance has been heralded as a potential solution to systemic risks faced by smallholder farmers in developing countries by covering risks such as drought, low crop yields, and low market prices. Despite its potential, demand has remained low in many early experiments and field trials. Little research has been done, however, on demand for insurance as it is coupled with other services such as loans. Here, willingness to pay for drought index insurance backed loans is investigated using contingent valuation methodology. Results demonstrate that on average the sample population has a willingness to pay high enough to sustain a market viable insured loan product without subsidization with 56% of the target population expressing a willingness to pay for an insured loan at the market price. Results also show a positive and significant WTP for individual policies and to avoid basis risk resulting from rainfall measurement.
    Keywords: Index Insurance, Willingness to Pay, Micro finance, Agricultural Finance, Demand and Price Analysis, International Development, Risk and Uncertainty,
    Date: 2015
  11. By: Luo, Tianyuan; Escalante, Cesar L.
    Abstract: In addition to direct compensation (salaries and bonuses), fringe benefits such as employer-provided health insurance (EPHI) may also influence an individual’s decisions on actual and expected employment duration. This study analyzes the potential of EPHI in job retention among documented and undocumented farm workers in the United States at a time period when the farm sector is experiencing labor shortage crisis attributed to stricter immigration controls. In this study, farm worker-level data was preprocessed using Coarsened Exact Matching and analyzed under an ordered probit model. The results indicate that documented farm workers are generally responsive to EPHI in terms of both their actual employment duration and subjective working expectations. However, the EPHI did not significantly influence the subjective work expectations of undocumented farm workers. Moreover, the results imply that EPHI could not possibly be an effective tool for retaining undocumented workers on the farm once they are legalized.
    Keywords: Employer-provided health insurance, Employment decision, Subjective expectation, Agricultural and Food Policy, Health Economics and Policy, Labor and Human Capital, I13, J62, Q12,
    Date: 2015
  12. By: Siddiqi, Hammad
    Abstract: The belief that the essence of the Black Scholes model is correct implies that one is unaware that a delta-hedged portfolio is risky, while believing that the proposition, a delta-hedged portfolio is risk-free, is true. Such partial awareness is equivalent to restricted awareness in which one is unaware of the states in which a delta-hedged portfolio is risky. In the continuous limit, two types of restricted awareness are distinguished. 1) Strongly restricted awareness in which one is unaware of the type of the true stochastic process. 2) Weakly restricted awareness, in which one is aware of the type of the true stochastic process, but is unaware of the true parameter values. We apply the generalized principle of no-arbitrage (analogy making) to derive alternatives to the Black Scholes model in each case. If the Black Scholes model represents strongly restricted awareness, then the alternative formula is a generalization of Merton’s jump diffusion formula. If the Black Scholes formula represents weakly restricted awareness, then the alternative formula, first derived in Siddiqi(2013), is a generalization of the Black Scholes formula. Both alternatives generate implied volatility skew. Hence, the sudden appearance of the skew after the crash of 1987 can be understood as the consequence of growing awareness, as investors realized that a delta-hedged portfolio is risky after suffering huge losses in their portfolio-insurance delta-hedges. The different implications of strongly restricted awareness vs. weakly restricted awareness for option pricing are discussed.
    Keywords: Partial Awareness, Restricted Awareness, Black Scholes Model, Analogy Making, Generalized Principle of No-Arbitrage, Implied Volatility Skew, Implied Volatility Smile, Portfolio Insurance Delta-Hedge, Financial Economics, G13, G12,
    Date: 2014–01
  13. By: Jun Nie (Federal Reserve Bank of Kansas City); Gaowang Wang (Shandong University); Eric Young (University of Virginia); Yulei Luo (The University of Hong Kong)
    Abstract: This paper derives the general equilibrium effects of rational inattention (or RI; Sims 2003, 2010) in a model of incomplete income insurance (Huggett 1993, Wang 2003). We show that, under the assumption of CARA utility with Gaussian shocks, the permanent income hypothesis (PIH) arises in steady state equilibrium due to a balancing of precautionary savings and impatience. We then explore how RI affects the equilibrium joint dynamics of consumption, income and wealth, and find that elastic attention can make the model fit the data better. We finally show that the welfare costs of incomplete information are even smaller due to general equilibrium adjustments in interest rates.
    Date: 2015

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