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Optimal Area‐Yield Crop Insurance Reconsidered
Author(s) -
Bourgeon JeanMarc,
Chambers Robert G.
Publication year - 2003
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/1467-8276.00458
Subject(s) - indemnity , yield (engineering) , crop insurance , adverse selection , information asymmetry , insurance policy , schedule , actuarial science , auto insurance risk selection , economics , microeconomics , business , agriculture , general insurance , geography , materials science , management , archaeology , metallurgy
The implementability of area‐yield insurance contracts in the presence of symmetric and asymmetric information about the farmer's “beta” linking his yield to the risk‐pool's yield is examined. In the presence of fixed costs and symmetric information Mahul's result that optimality requires setting the slope of the indemnity schedule equal to each farmer's beta is confirmed. When there is asymmetric information between the insurer and the farmer, however, this full‐insurance contract is vulnerable to adverse selection, and therefore may not be implementable for general cost structures. The optimal area‐yield insurance contract under asymmetric information is characterized.