Risk aversion in crop insurance program purchase decisions

Abstract

Purpose The purpose of this paper is to contribute to the aforementioned literature on the linkage between economic activity and human preference by estimating the cross-sectional determinants of farmers’ participation in participation in crop insurance programs (CIPs) and identifying the impediments preventing the remaining farmers from participating. Design/methodology/approach Using the unique data sets of risk preference experiments and maize producer surveys pertaining to the maize production areas of China, this paper explores the determinants of farmers’ CIPs and scrutinizes the role of risk aversion in farmers’ CIP purchase decisions under the expected utility maximization framework. And a “non-zero threshold probit model” is used for the analysis. Findings The results show that risk aversion plays an important role in CIP purchase decision-making, not only in the form of its direct effect but also with regard to the interaction term and expected loss. Furthermore, if the insured amount is high enough, then risk aversion will no longer affect insurance purchase. Additionally, purchase experience, CIP environment (village purchase ratio), and contract items (insured amounts) are significant determinates in these decisions. There is no significant evidence to suggest that serious adverse selection exists in the sampling areas. Originality/value One theoretical model is established which considered not only general variables like farmers’ production and household information, but also conditions and terms in the insurance policies. The unique experimental method is used to measure farmers’ risk aversion. Both the role of risk aversion and its’ interaction terms with others in CIP participation are scrutinized to identify complicated influences under the context of real society.

Risk Aversion, Risk Preference and Farmers’ Decision to Participate in Broiler Contract Farming: A Case Study in Jember, Indonesia

“…This ambiguity has been discussed by Peng and Pang (2019), who found that farmers' risk aversion increased with the farm size. In contrast with our research finding, Lyu and Barré (2017); Belissa et al (2019) and Yanuarti et al (2019) have found that farmer's risk aversion level had a significant influence towards their decision to participate in insurance. Farmers with high risk aversion would be willing to join agricultural insurance.…”

Risk aversion level influence on farmer's decision to participate in crop insurance: A review

“…These results are consistent with Lyu and Barré (2017) research which states that farmers with high risk aversion and large planting areas will be willing to participate in agricultural insurance. Conversely, farmers with low risk aversion and small cropland areas will refuse to participate.…”

“…Farmers with a high perception of risk generally take part in an insurance program. Lyu and Barré (2017) analyse farmer risk aversion levels by using a ball-game experiment. The experimental design was modified so it would easily be understood by farmers.…”

A Test on Adverse Selection of Farmers Decision to Purchase Crop Insurance

“…Based on logistic regression result of RAL variable, we can conclude that the result was consistent with a previous study [10] which stated that farmers with high risk aversion and large planting areas would be willing to participate in agricultural insurance. Conversely farmers with low risk aversion and small land areas will refuse to participate, or in other words, Farmers who do not like risk will tend to participate in insurance.…”

“…The focus of agricultural insurance research in Indonesia mainly about agricultural insurance models that suitable to be applied in Indonesia, for example feasibility and perspective of developing rice and corn insurance [7] [8], and specifically climate insurance models, which was still focused on the design of agricultural insurance models in Indonesia [9]. Research that addresses the existence of adverse selection in the implementation of agricultural insurance has been carried out in China [10] [11]. Adverse selection affects the farmer's decision to take insurance.…”