Asymmetric Information in the Market for Yield and Revenue Insurance

by Shiva S. Makki and Agapi Somwaru

This report analyzes farmers' choice of crop insurance contracts and tests for the presence of asymmetric information in the market for multiple yield and revenue insurance products. Farmers' risk characteristics, their level of income, and the cost of insurance significantly affect their choices of yield and revenue insurance products as well as their selections of alternative coverage levels. Empirical analysis indicates that, in the presence of asymmetric information, high-risk farmers are more likely to select revenue insurance contracts and higher coverage levels. The results also indicate that premium rates do not accurately reflect the likelihood of losses, implying informational asymmetrics in the crop insurance market.

Keywords: Asymmetric information, adverse selection, crop insurance, revenue insurance, risk management

In this publication...

• Entire Report
• Abstract
• Introduction
• Asymmetric Information in Insurance Markets
• Theoretical Considerations
• Crop Yield and Revenue Insurance Contracts
• Description of the Data
• Empirical Model and Hypotheses Testing
• Empirical Results
• Summary and Conclusions
• Limitations of the Study and Scope for Further Research
• End Notes
• References