Academic journal article Agricultural and Resource Economics Review

Modeling Exit and Entry of Farmers in a Crop Insurance Program

Academic journal article Agricultural and Resource Economics Review

Modeling Exit and Entry of Farmers in a Crop Insurance Program

Article excerpt

This paper examines the factors influencing farmer participation in crop insurance schemes, but unlike previous studies that focus on total demand, participation is disaggregated into entrants and those exiting. Modeling entry and exit decisions separately illustrates that the effect of a given variable is often muted by aggregation. In addition, the approach in this paper distinguishes between price and yield variables rather than total returns and is consequently able to demonstrate that price variables are particularly important for farmers considering enrolling in crop insurance, while yield variables and other risk management opportunities are more important for farmers who have been in the program but are deciding to exit. The result suggests that moral hazard is reduced significantly by calculating the coverage yield level for an individual producer on the basis of a moving average of past yields for that farmer. While yield and its variance are particularly influential in the participation decision for farmers currently enrolled, its significant impact on the insurance decision for all farmers highlights the importance of crop insurance as a potential adaptation strategy to weather events.

Key Words: crop insurance, entry and exit, panel data

(ProQuest: ... denotes formulae omitted.)

Farmers increasingly are relying on crop insurance as a risk management tool that replaces government stabilization programs. Previous studies on the demand for crop insurance have not examined how the demand factors vary between those farmers currently enrolled in the program and those farmers without crop insurance. Past research on crop insurance participation has relied on aggregate state- or county-level data over a period of time or on a specific micro-level survey for a given period. Examples of the former include Goodwin and Smith (1995), Goodwin (1993), Barnett, Skees, and Hourigan (1990), Hojjatti and Bockstael (1988), Gardner and Kramer (1986), and Nieuwoudt et al. (1985). These time series studies generally estimate the proportion of eligible area within a region that is insured as a function of factors such as expected return to insurance and demographic/physical characteristics of the region that proxy alternative risk management options. Studies of the latter sample individual farmers at a given point in time and examine the decision to participate and the corresponding level of coverage as a function of socioeconomic and farm characteristics of the producer (i.e., Sherrick et al. 2004, Garrido et al. 2002, and Coble et al. 1996). None of the studies have used panel data to examine the drivers of exit and entry decisions in a crop insurance plan.

This paper decomposes demand into not only total participation but also the number of farmers who enter and exit a crop insurance program, and in the process illustrates that the effect of a given variable is often muted by the aggregation. While previous studies help us understand the factors that matter for all farmers enrolled in a crop insurance program, they offer limited information to understand how the same factors might influence the dynamic decisions of new entrants or dropouts. For instance, previous studies have found that the demand for crop insurance is highly inelastic with respect to premium rates. Since these studies agglomerate all participating farmers, these models are not well-suited to capture any differential effect that premium rates might have on those farmers purchasing insurance for the first time versus those currently enrolled and considering continuing or canceling their policies. This study also finds own price demand to be inelastic for all farmers, but the decomposition also shows that demand is much more elastic for farmers considering enrolling in crop insurance.

Similarly, the effect of previous yield realizations and yield variability has remained relatively unexplored in the crop insurance literature, with the exception of Goodwin (1993). …

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