Modeling Exit and Entry of Farmers in a Crop Insurance Program

This paper examines the factors influencing farmer participation in crop insurance schemes, but unlike previous studies that focus on total demand, participation is disaggregated into en-trants and those exiting. Modeling entry and exit decisions separately illustrates that the effect of a given variable is often muted by aggregation. In addition, the approach in this paper dis-tinguishes between price and yield variables rather than total returns and is consequently able to demonstrate that price variables are particularly important for farmers considering enrolling in crop insurance, while yield variables and other risk management opportunities are more im-portant for farmers who have been in the program but are deciding to exit. The result suggests that moral hazard is reduced significantly by calculating the coverage yield level for an indi-vidual producer on the basis of a moving average of past yields for that farmer. While yield and its variance are particularly influential in the participation decision for farmers currently enrolled, its significant impact on the insurance decision for all farmers highlights the impor-tance of crop insurance as a potential adaptation strategy to weather events