The Demand for Multiple Peril Crop Insurance: Evidence from Montana Wheat Farms

Abstract

Abstract An econometric analysis of the demand for multiple peril crop insurance is carried out for a sample of 370 Montana wheat farms. The study is the first to model the farm's participation and coverage‐level decisions separately through Heckman two‐stage estimation procedures. These decisions are shown to be determined in different ways. In addition, farms with positive expected returns from insurance make coverage‐level decisions in different ways from farms with negative expected returns. These differences indicate that adverse selection effects limit the efficacy of across‐the‐board premium rate increases as mechanisms for reducing loss ratios.