Moral hazard and adverse selection effects of cost-of-production crop insurance: evidence from the Philippines

Abstract

© 2019 Australasian Agricultural and Resource Economics Society Inc. This article examines the moral hazard and adverse selection effects of cost-of-production (COP) crop insurance products. Building on existing crop insurance models of moral hazard, as well as a survey-based data set that allows us to separately identify moral hazard from adverse selection, we find evidence that farmers insured under COP contracts spend more on chemical fertilizers and pesticides (i.e. those inputs whose costs determine the indemnity payments). However, since these same COP insured farmers are still likely to use less inputs (like effort) whose costs do not enter the indemnity payment formula, and yield depends on both types of inputs (i.e. the determinants and non-determinants of the indemnity payments), the final moral hazard effect of COP insurance on yields is ambiguous. Our analysis also suggests that farmers who tend to spend less on chemical fertilizers and pesticides are the ones with private information on soil conditions and pest incidence. These are the types of farmers who adversely select into COP contracts that only cover weather related losses.

Source or Periodical Title

Australian Journal of Agricultural and Resource Economics

ISSN

1364985X

Page

166-197

Document Type

Article

Subject

adverse selection, crop insurance, moral hazard

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