Doctoral Dissertation Research in Economics: Hidden information and Hidden Action in Rural Crop Insurance Markets

Yale University, New Haven CT

Investigators

Abstract

Abstract Agriculture is inherently risky, perpetually under threat from draughts, hurricanes, floods, pests and crop diseases. In response to farmers' need to manage risk, governments and policy makers throughout the world have for decades attempted to provide public crop insurance or promote its private provision. Almost all such attempts have failed to operate sustainably without government subsidies. Project: The researchers propose to study the reasons for this failure of crop insurance. They will, in partnership with the Philippine Crop Insurance Corporation, a government entity, implement an experimental crop insurance program offered to rice farmers in rural Philippines. The design will allow them to separately identify the extent of adverse selection (i.e. when demand for insurance is higher among farmers who are more at risk) and moral hazard (i.e. lowered incentives of covered farmers to prevent damages), the main barriers to efficient workings of insurance markets. Intellectual merit: Using recent developments in experimental methodology, the researchers will be able to provide an empirical foundation for seminal theoretical papers on the economics of contracts by empirically decomposing these theoretical mechanisms. In addition, they will go beyond recent experimental contributions by incorporating measures of preferences, such as an individuals' aversion to risk, to further decompose the contract selection decision. This empirical evidence will contribute to the iterative process, from theory to testing and back to theory, that is so essential to the advancement of scientific knowledge. Broader impacts: The research has the promise to have broad implications for the design and implementation of public insurance programs. The findings will improve understanding of the workings of insurance markets and may lead to better regulation and more efficient insurance markets. Finally, it will help in the design of crop insurance programs in particular and thereby improve both risk management options for poor rural farmers and the governments' use of public funds for rural development.