2015
DOI: 10.1093/ajae/aav032
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Abstract: Farmers’ decisions about how much crop insurance to buy are not generally consistent with expected utility maximization. Taking into account both marginal risk benefits and marginal subsidy effects suggests that most farmers have chosen lower coverage levels than would be predicted by standard models. By modeling financial outcomes as gains and losses, cumulative prospect theory offers an alternative framework to perhaps better understand farmers’ purchase decisions. The role of the reference point that define… Show more

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Cited by 88 publications
(114 citation statements)
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References 11 publications
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“…In addition, Bocquého, Florence, and Arnaud (2014) compare the fit of expected utility and prospect theory, and they suggest farmers are twice as sensitive to losses as to gains and tend to overweigh low probability extreme events in an experimental lottery. Babcock (2015) finds that crop insurance levels are significantly lower than predicted by expected utility maximization. He shows that loss aversion and the choice of the reference point are key factors in insurance coverage choices.…”
Section: Behaviors Under Risk and Deviations From Expected Utilitymentioning
confidence: 85%
See 1 more Smart Citation
“…In addition, Bocquého, Florence, and Arnaud (2014) compare the fit of expected utility and prospect theory, and they suggest farmers are twice as sensitive to losses as to gains and tend to overweigh low probability extreme events in an experimental lottery. Babcock (2015) finds that crop insurance levels are significantly lower than predicted by expected utility maximization. He shows that loss aversion and the choice of the reference point are key factors in insurance coverage choices.…”
Section: Behaviors Under Risk and Deviations From Expected Utilitymentioning
confidence: 85%
“…Babcock () finds that crop insurance levels are significantly lower than predicted by expected utility maximization. He shows that loss aversion and the choice of the reference point are key factors in insurance coverage choices.…”
Section: Emerging Focal Areas and Their Opportunitiesmentioning
confidence: 99%
“…For example, in the risk domain, Babcock (2015) uses parameters elicited under cumulative prospect theory to explain the deductible choices of US farmers. Similar analyses could be done with respect to ambiguity using simulation or theory.…”
Section: Discussionmentioning
confidence: 99%
“…It is mainly focused on insurance subsidies (e.g. Babcock andHart, 2005 andDonoghue, 2014), risk frequency (e.g. Coble et al, 1996), asymmetric information (e.g.…”
Section: Agricultural Insurance System Sustainability and Risk Predicmentioning
confidence: 99%
“…Moreover, Babcock (2015) concluded that farmers regard crop insurance not only as a risk management tool but also as an income support. Thus, within this analysis, it was assumed that farmer chooses between the two prospects-insurance and no insurance -on the basis of expected profitability of each of the choices.…”
Section: Is the Concept Of Yield Gap Useful For Asymmetric Informatiomentioning
confidence: 99%