Three Essays on Farmers' Crop Insurance Choices

Download or read book Three Essays on Farmers' Crop Insurance Choices written by Ran Huo and published by . This book was released on 2019 with total page 288 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation includes three essays investigating smallholder farmers' demand for crop insurance in China using data from a series of economic surveys and experiments with 477 vegetable farmers in China. The first essay focuses on farmers' preferences for crop insurance under alterative frames and coverage level. The empirical findings, when viewed through the lens of expected utility theory, reveal three anomalies. First, we find that farmers tend to place less value on a risk-reducing contract framed in the context of crop insurance compared to an otherwise equivalent contract not framed as insurance. Second, farmers place a relatively higher value on low coverage contracts compared to high coverage contracts. Third, farmers who are more risk averse or loss averse are found to be less willing to purchase crop insurance with a high coverage level. Building upon these findings, the second essay reconciles these anomalous findings within a prospect theory framework under narrow framing. Recognizing that farmers in rural areas of developing countries may have less experience with crop insurance and less trust in the institutions managing crop insurance suggests that farmers may tend to view crop insurance as an innovative technology rather than a risk-transferring tool. Empirical tests indicate support for this conjecture. We find that farmers' decisions in the surveys and experiments correspond with theoretical predictions under prospect theory for an agent who evaluates a crop insurance purchase deception independently from their crop revenue. Focusing on the challenge for farmers to evaluate crop insurance policies and estimate the actuarially fair premium underlying a policy, the third essay develops a probabilistic model incorporating biased estimates of the actuarially fair premium in order to explain economically suboptimal take-up of crop insurance by smallholder farmers. Evidence from the probabilistic model employing data from the economic surveys and experiments partially explains the anomalous decisions found in the first essay. Critically, we find that farmer's risk aversion, average propensity to consume, and other key sociodemographic variables have explanatory power for farmers' willingness to pay for a crop insurance contract and farmers' estimate of the actuarially fair premium for a crop insurance contract.