Should Bank Provide Insurance for Horticultural Crop Damage? (A Stackelberg Game Approach)

Abstract

This study provides insight for a bank to insure farmers with the possibility of having horticultural crops damaged. Specifically, a Stackelberg leadership game is formulated with the bank as the leader and the farmer as the follower. The bank declares its insurance fee first to anticipate the horticulture prices and maximize its profit. Then, the farmer decides the horticulture price sequentially given the insurance fee and the crop condition. The game is solved under the with and without insurance scenarios. The farmer decides its horticulture price with no banking insurance fee in without insurance scenario. The bank decision-making is only included in with insurance scenario. From the analytical comparison result, it is better for the farmer to have insurance from the bank when the probability of damage to a horticultural crop exists. However, the bank should give an insurance fee to the farmer with a high probability of having good horticultural crops and less customer sensitivity to damaged crops.