Input Use Decisions with Greater Information on Crop Conditions: Implications for Insurance Moral Hazard and the Environment

Emerging precision agriculture technologies allow farms to make input decisions with greater information on crop conditions. This greater information occurs by providing improved predictions of crop yields using remote sensing and crop simulation models and by allowing farms to apply inputs within the growing season when some crop conditions are already realized. We use a stylized model with uncertainty in yield and price to examine how greater information on crop conditions (i.e., a “forecast”) affects input use for insured and uninsured farms. We show that moral hazard decreases—farms apply more inputs—as the forecast accuracy improves when the forecast indicates good yields, and vice versa when the forecast indicates bad yields. In the long run, moral hazard decreases in response to an improvement in forecast accuracy. Even though moral hazard decreases in the long run, indemnity payments are likely to increase in the long run—driven by the increase in moral hazard when the forecast indicates bad crop conditions. We use the results of our model to discuss the potential impact of different technologies and types of inputs on the federal crop insurance program and the environment

The Role of Risk in Farmland Contract Choices

Understanding the role of risk in farmland leasing contract choices is important to assess the welfare consequences of farm policies or environmental changes that affect production risk. We use a unique dataset of landowners and tenants in Kansas to examine the role of risk in their farmland leasing contract choices. We find that greater production risk and more risk-averse landowners encourage fixed cash rent contracts. As many variables can potentially affect contract choices, we use a penalized regression to show that the inclusion of relationship variables leads to little change in the main results

Effects of Subsidized Crop Insurance on Crop Choices

This study focuses on how subsidized crop insurance affects the farm portfolio. Crop insurance programs may change the investment decision of farmers due to risk reduction or premium subsidies. First, actuarially fair insurance reduces the risk of farmers, holding expected return constant. Second, premium subsidies encourage farmers to purchase crop insurance and increases the expected return to the risky crop. Yet, outside of crop insurance, farmers have self-insurance mechanisms available, such as crop diversification. I derive conditions for when actuarially fair insurance and premium subsidies lead to more investment in the risky higher-return crop, while allowing for self-insurance. The effect of premium subsidies are decomposed into an encouragement (indirect) effect and a relative profitability (direct) effect. These effects are explained by the interaction between market insurance and self-insurance, and the interaction between a risky crop and a safe crop. I discuss each effect as a combination of a wealth effect and a substitution effect. The framework provides a novel view of the evaluation of subsidized crop insurance programs

Replication material for Ijaz and Yu (2024)

This contains the replication material for Ijaz and Yu, "Recovering from Natural Disaster through Exports: The Case of 2010 Pakistan Flood and EU Tariff Waiver on Pakistan Textile Exports