Evidence of Adverse Selection in Crop Insurance Markets

Abstract

This article analyzes farmers' choices of crop insurance contracts and offers empirical evidence of adverse selection in crop insurance markets. Farmers' risk characteristics, their level of income, and the cost of insurance significantly affect the choice of yield and revenue insurance products as well as the selection of alternative coverage levels. Empirical analysis indicates that high-risk farmers are more likely to select revenue insurance contracts and higher coverage levels. Results show that low-risk farmers are overcharged and high-risk farmers are undercharged for comparable insurance contracts, implying informational asymmetries in the crop insurance market.