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Moral hazard and subsidized crop insurance
Author(s) -
Wu Shenan,
Goodwin Barry K.,
Coble Keith
Publication year - 2020
Publication title -
agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.29
H-Index - 82
eISSN - 1574-0862
pISSN - 0169-5150
DOI - 10.1111/agec.12545
Subject(s) - moral hazard , crop insurance , subsidy , indemnity , morale hazard , actuarial science , economics , adverse selection , payment , business , agricultural economics , insurance policy , public economics , natural resource economics , agriculture , casualty insurance , incentive , auto insurance risk selection , finance , microeconomics , geography , market economy , archaeology
Along with adverse selection, moral hazard is one of the major hurdles that private and public insurance plans must contend with. Moral hazard occurs if risks are endogenous to a producer's behavior and if the insurer is unable to properly monitor the insured. We review the role of moral hazard in the US crop insurance program. We conduct an empirical analysis of one important aspect of the US crop insurance program—prevented planting. This provision provides indemnity payments if conditions are not suitable for planting. The program has been the subject of considerable controversy, especially during 2019, when the rate of claims is expected to be especially high. Because loss adjustors may encounter difficulties in assessing the weather conditions associated with prevented planting claims, the program is susceptible to moral hazard. We consider the extent to which prevented planting claims may be endogenous to prices. We find significant evidence of moral hazard. The likelihood of prevented planting claims increases as the expected market price decreases or as fertilizer costs increase for corn and soybeans in the Prairie Pothole Region and for grain sorghum and cotton in all states.