Crop Insurance, Moral Hazard, and Agricultural Chemical Use

Abstract

This study examines the relationship between chemical input use and crop insurance purchase decisions for a sample of Kansas dryland wheat farmers. Recent research by Horowitz and Lichtenberg indicated that, contrary to conventional wisdom, farmers that purchased insurance tended to use relatively more chemical inputs than farmers who did not insure. In contrast, our results confirm the conventional view that moral hazard incentives lead insured farmers to use fewer chemical inputs. Implications for the joint determination of insurance and input use decisions and appropriate estimation techniques are discussed. Copyright 1996, Oxford University Press.

How Drought Affects Agricultural Insurance Policies: The Case of Italy

“…Smith and Goodwin (1996), using different insurance variables, i.e. crop insurance, chemical input, premium rate, yield, farmers' beliefs, farmers' preferences, debt to asset ratio, total from crop acres, proportion of total farm sales derived from livestock sales, percentage of cropped dryland wheat acres rented by the farm, off-farm labor income, show that dry wheat growers who subscribe to crop insurance use fewer agricultural chemicals.…”

Crop Insurance Subsidies and Environmental Externalities: Evidence from Southern Italy

“…There is extensive literature on the potential environmental impacts of government-sponsored risk management programmes such as subsidised crop insurance and crop disaster payments (Horowitz and Lichtenberg 1993, Smith and Goodwin 1996, Wu 1999, Seo, Mitchell and Leatham, 2005 Concerning the use of chemical input, early studies examined the impact of price uncertainty on a competitive, one-input, one-output firm (Sandmo, 1971;Ishii, 1977;Briys and Eeckhoudt, 1985;Hey, 1985). Pope and Kramer (1979) modelled production risks by analyzing their effects on input use.…”

“…The net effect is ambiguous. Smith and Goodwin (1996) doubted that the expected indemnity payment increased with input use for two reasons. Firstly, chemical inputs increase production costs, and lower (increase) the expected profits (losses) when indemnity payments are made.…”

“…In fact, while chemical and fertilizer applications tend to influence yield and profit variance, crop insurance subsidies are usually provided to farmers located in risky areas in order to help risk-averse farmers tocope with risks and increase the cultivated area. Readers interested in this research area are referred to Babcock and Hennessy (1996), Smith and B. K. Goodwin (1996) and Moschini and Hennessy (2001).…”

Farmers’ Risk Preferences and Agricultural Weather Index Insurance Uptake in Rural China

“…However, conventional agricultural insurance with a single rate has some well-known problems, including adverse selection (Quiggin et al 1993;Just et al 1999;Makki and Somwaru 2001), moral hazard (Horowitz and Lichtenberg 1993;Smith and Goodwin 1996), and systemic risk (Miranda and Glauber 1997;Miranda and Farrin 2012). Given these problems associated with conventional agricultural insurance, in the past two decades a growing number of national governments, academic researchers, and international nongovernmental organizations have exhibited great interest in a new form of agricultural insurance known as weather index insurance, which is based on recorded meteorological data that are highly associated with crop losses (Barnett and Mahul 2007;Bryla and Syroka 2007;Chantarat et al 2007;Miranda and Farrin 2012;Cao et al 2013).…”