Insurability and Moral Hazard in Agricultural Insurance Markets

TLDR

The paper examines Pareto‑optimal and constrained Pareto‑optimal all‑risk insurance contracts. The authors isolate conditions for competitive insurance markets and analyze how moral hazard affects all‑risk agricultural insurance indemnity schedules. The study finds that full insurance contracts are dominated by coinsurance and deductible contracts under pseudo‑risk‑averse insurers, and that moral hazard can lead to lower deductibles when farmers are incentivized to act appropriately.

Abstract

Abstract Pareto‐optimal and constrained Pareto‐optimal all‐risk insurance contracts are studied. Conditions required for emergence of competitive insurance markets are isolated and discussed. Full insurance contracts are shown to be dominated by contracts involving coinsurance and deductibles if insurers are pseudo‐risk averse. The effect of moral hazard on all‐risk agricultural insurance indemnity schedules is examined. Results for indemnity schedules under moral hazard and constant absolute risk aversion show that providing farmers with the incentives to take appropriate actions may imply lower deductibles in the presence of moral hazard than in the absence of moral hazard.