Three Essays on US Agricultural Insurance

Many economists and policy analysts have conducted studies on crop insurance. Three research gaps are identified: i) moral hazard in prevented planting (PP), ii) choice of PP and planting a second crop, and iii) selecting margin protection in the Dairy Margin Protection Program (MPP-Dairy). The first essay analyzes the existence of moral hazard in PP. The PP provision is defined as the “failure to plant an insured crop by the final planting date due to adverse events”. If the farmer decides not to plant a crop, the farmer receives a PP indemnity. Late planting (LP) is an option for the farmer to plant a crop while maintaining crop insurance after the final planting date. Crop insurance may alter farmers’ behavior in selecting PP or LP and could increase the likelihood of PP claims even though farmers can choose LP. This study finds evidence that a farmer with higher insurance coverage tends to choose PP more often (moral hazard). Spatial panel models attest to the existence of moral hazard in PP empirically. If a farmer chooses PP, s/he receives the PP indemnity and may either leave the acreage unplanted or plant a second crop, e.g., soybean for corn. If the farmer plants a second crop after the PP claim, the farmer receives a 35% of PP payment. The current PP provision fails to provide farmers with an incentive to plant a second crop; 99.9% of PP claiming farmers do not plant a second crop. Adjusting PP indemnity payment may encourage farmers to plant a second crop. The second essay explores this question using a stochastic simulation and suggests to increase the PP payment by 10%-15%. The third essay investigates why Wisconsin dairy farmers purchase more supplementary protection than California farmers in a MPP-Dairy introduced in the 2014 Farm Bill. MPP-Dairy provides dairy producers with margin protection when the national dairy margin is below a farmer selected threshold. This study determines whether conditional probabilities regarding regional and national margins have a role in farmer’s decision-making to purchase supplementary coverages using Copula models. Results indicate that Wisconsin farmers have higher conditional probabilities and purchase more buy-up coverages