[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/rae/wpaper/201603.html
   My bibliography  Save this paper

The impact of farmers' risk preferences on the design of an individual yield crop insurance

Author

Listed:
  • Laurent Piet
  • Douadia Bougherara
Abstract
Kahneman and Tversky's Cumulative Prospect Theory (CPT) has proved to be better suited for representing risk preferences than von Neumann and Morgenstern's Expected Utility Theory (EUT). We argue that neglecting this may explain to some extent why farmers do not contract crop insurance as much as they are expected to. We model the decision to contract an individual yield crop insurance for a sample of 186 French farmers. We show that 21% of the farmers who would be expected to contract assuming that their preferences are EUT, would actually not do so if their true preferences were in fact CPT.

Suggested Citation

  • Laurent Piet & Douadia Bougherara, 2016. "The impact of farmers' risk preferences on the design of an individual yield crop insurance," Working Papers SMART 16-03, INRAE UMR SMART.
    • Handle: RePEc:rae:wpaper:201603
    as

    Download full text from publisher

    File URL: http://ageconsearch.umn.edu/bitstream/233495/2/wp16-03.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Galarza, Francisco, 2009. "Choices under Risk in Rural Peru," MPRA Paper 17708, University Library of Munich, Germany.
    2. Vincent H. Smith & Joseph W. Glauber, 2012. "Agricultural Insurance in Developed Countries: Where Have We Been and Where Are We Going?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 34(3), pages 363-390.
    3. Jerry R. Skees & J. Roy Black & Barry J. Barnett, 1997. "Designing and Rating an Area Yield Crop Insurance Contract," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 430-438.
    4. John C. Quiggin & Giannis Karagiannis & J. Stanton, 1993. "Crop Insurance And Crop Production: An Empirical Study Of Moral Hazard And Adverse Selection," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 37(2), pages 95-113, August.
    5. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    6. Robert G. Chambers & John Quiggin, 2002. "Optimal Producer Behavior in the Presence of Area-Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(2), pages 320-334.
    7. Tomomi Tanaka & Colin F. Camerer & Quang Nguyen, 2010. "Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam," American Economic Review, American Economic Association, vol. 100(1), pages 557-571, March.
    8. Jean-Marc Bourgeon & Robert G. Chambers, 2003. "Optimal Area-Yield Crop Insurance Reconsidered," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(3), pages 590-604.
    9. Joseph W. Glauber, 2004. "Crop Insurance Reconsidered," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(5), pages 1179-1195.
    10. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    11. Bougherara, Douadia & Gassmann, Xavier & Piet, Laurent, 2011. "A structural estimation of French farmers’ risk preferences: an artefactual field experiment," Working Papers 208109, Institut National de la recherche Agronomique (INRA), Departement Sciences Sociales, Agriculture et Alimentation, Espace et Environnement (SAE2).
    12. repec:feb:artefa:0092 is not listed on IDEAS
    13. Quang Nguyen & Colin Camerer & Tomomi Tanaka, 2010. "Risk and Time Preferences Linking Experimental and Household Data from Vietnam," Post-Print halshs-00547090, HAL.
    14. Smith, Vincent H. & Chouinard, Hayley H. & Baquet, Alan E., 1994. "Almost Ideal Area Yield Crop Insurance Contracts," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 23(1), pages 1-9, April.
    15. Carl H. Nelson & Edna T. Loehman, 1987. "Further Toward a Theory of Agricultural Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(3), pages 523-531.
    16. Coelho, Luís Alberto Godinho & Pires, Cesaltina Maria Pacheco & Dionísio, Andreia Teixeira & Serrão, Amílcar Joaquim da Conceição, 2012. "The impact of CAP policy in farmer's behavior – A modeling approach using the Cumulative Prospect Theory," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 81-98.
    17. Vincent H. Smith & Joseph W. Glauber, 2012. "Agricultural Insurance in Developed Countries: Where Have We Been and Where Are We Going?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 34(3), pages 363-390.
    18. Olivier Mahul, 1999. "Optimum area yield crop insurance," Post-Print hal-01952090, HAL.
    19. Mario J. Miranda, 1991. "Area-Yield Crop Insurance Reconsidered," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(2), pages 233-242.
    20. Olivier Mahul, 1999. "Optimum Area Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(1), pages 75-82.
    21. Mario J. Miranda & Joseph W. Glauber, 1997. "Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 206-215.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xiaodong Du & Hongli Feng & David A. Hennessy, 2017. "Rationality of Choices in Subsidized Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(3), pages 732-756.
    2. Shuoli Zhao & Chengyan Yue, 2020. "Risk preferences of commodity crop producers and specialty crop producers: An application of prospect theory," Agricultural Economics, International Association of Agricultural Economists, vol. 51(3), pages 359-372, May.
    3. Mohit Anand & Ruiqing Miao & Madhu Khanna, 2019. "Adopting bioenergy crops: Does farmers’ attitude toward loss matter?," Agricultural Economics, International Association of Agricultural Economists, vol. 50(4), pages 435-450, July.
    4. Simone Severini & Cinzia Zinnanti & Valeria Borsellino & Emanuele Schimmenti, 2021. "EU income stabilization tool: potential impacts, financial sustainability and farmer’s risk aversion," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 9(1), pages 1-21, December.
    5. Thomas Sproul & Clayton P. Michaud, 2017. "Heterogeneity in loss aversion: evidence from field elicitations," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 77(1), pages 196-216, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Douadia Bougherara & Laurent Piet, 2018. "On the role of probability weighting on WTP for crop insurance with and without yield skewness," Working Papers hal-02790605, HAL.
    2. Mahul, Olivier & Vermersch, Dominique, 1999. "Hedging Crop Risk With Yield Insurance Futures And Options," 1999 Annual meeting, August 8-11, Nashville, TN 21672, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Petraud, Jean & Boucher, Stephen & Carter, Michael, 2015. "Competing theories of risk preferences and the demand for crop insurance: Experimental evidence from Peru," 2015 Conference, August 9-14, 2015, Milan, Italy 211383, International Association of Agricultural Economists.
    4. Shuoli Zhao & Chengyan Yue, 2020. "Risk preferences of commodity crop producers and specialty crop producers: An application of prospect theory," Agricultural Economics, International Association of Agricultural Economists, vol. 51(3), pages 359-372, May.
    5. Matthieu Stigler & David Lobell, 2020. "On the benefits of index insurance in US agriculture: a large-scale analysis using satellite data," Papers 2011.12544, arXiv.org, revised Nov 2021.
    6. Lauriane Yehouenou & Barry J Barnett & Ardian Harri & Keith H Coble, 2018. "STAX Appeal?," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 40(4), pages 563-584, December.
    7. Bocqueho, Geraldine & Jacquet, Florence & Reynaud, Arnaud, 2011. "Expected Utility or Prospect Theory Maximizers? Results from a Structural Model based on Field-experiment Data," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114257, European Association of Agricultural Economists.
    8. Glauber, Joseph W., 2017. "Agricultural insurance and the WTO:," IFPRI book chapters, in: Bouët, Antoine & Laborde Debucquet, David (ed.), Agriculture, development, and the global trading system: 2000– 2015, chapter 10, International Food Policy Research Institute (IFPRI).
    9. Weaver, Robert D. & Kim, Taeho, 2002. "Designing Crop Insurance to Manage Moral Hazard Costs," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24784, European Association of Agricultural Economists.
    10. Matthieu Stigler & David Lobell, 2021. "Optimal index insurance and basis risk decomposition: an application to Kenya," Papers 2111.08601, arXiv.org, revised Mar 2023.
    11. Nadia A. Streletskaya & Samuel D. Bell & Maik Kecinski & Tongzhe Li & Simanti Banerjee & Leah H. Palm‐Forster & David Pannell, 2020. "Agricultural Adoption and Behavioral Economics: Bridging the Gap," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 42(1), pages 54-66, March.
    12. Niyibizi, Bart & Brorsen, Wade & Park, Eunchun, 2018. "Using Bayesian Kriging for Spatial Smoothing of Trends in the Means and Variances of Crop Yield Densities," 2018 Annual Meeting, August 5-7, Washington, D.C. 274403, Agricultural and Applied Economics Association.
    13. Xiaodong Du & Hongli Feng & David A. Hennessy, 2017. "Rationality of Choices in Subsidized Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(3), pages 732-756.
    14. Alexis H. Villacis & Jeffrey R. Alwang & Victor Barrera, 2021. "Linking risk preferences and risk perceptions of climate change: A prospect theory approach," Agricultural Economics, International Association of Agricultural Economists, vol. 52(5), pages 863-877, September.
    15. Robert Kast, 2011. "Managing financial risks due to natural catastrophes," Working Papers hal-00610241, HAL.
    16. Enjolras, Geoffroy & Capitanio, Fabian & Adinolfi, Felice, 2012. "The Demand for Crop Insurance: Combined Approaches for France and Italy," Agricultural Economics Review, Greek Association of Agricultural Economists, vol. 13(1), pages 1-18.
    17. Bharat Ramaswami & Terry L. Roe, 2002. "Aggregation in area yield insurance:The linear additive model," Discussion Papers 02-08, Indian Statistical Institute, Delhi.
    18. Bokusheva, Raushan, 2004. "Crop insurance in transition: a qualitative and quantitative assessment of insurance products," IAMO Discussion Papers 76, Leibniz Institute of Agricultural Development in Transition Economies (IAMO).
    19. Stigler, Matthieu M. & Lobell, David, 2020. "Suitability of index insurance: new insights from satellite data," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304663, Agricultural and Applied Economics Association.
    20. Bokusheva, Raushan, 2004. "Crop insurance in transition: A qualitative and quantitative assessment of insurance products (Preliminary results)," IAMO Discussion Papers 14869, Institute of Agricultural Development in Transition Economies (IAMO).

    More about this item

    Keywords

    yield; crop insurance; cumulative prospect theory; premium subsidy; France;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q10 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - General
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rae:wpaper:201603. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anne Chauvel (email available below). General contact details of provider: https://edirc.repec.org/data/inrarfr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.