The role of ex ante regulations in addressing problems of moral hazard in agricultural insurance

Abstract

We develop a theoretical model of input use by agricultural producers who purchase crop insurance, and thus may engage in moral hazard. Through simulations, our findings show a combination of partial insurance coverage and partial monitoring of inputs may reduce substantially the problems associated with moral hazard. The minimum level of input use that must be required by regulation is determined to be substantially lower than the optimal or actual input level chosen by producers. Because the use of inputs for crop production occurs in many stages over the pre‐planting, planting, and growing seasons, only a minimal input requirement is needed. Thus, the cost of implementing such a regulation can be kept much lower than would be the case for a regulation of complete monitoring of input usage.

Citation

Turvey, C.G., Hoy, M. and Islam, Z. (2002), "The role of ex ante regulations in addressing problems of moral hazard in agricultural insurance", Agricultural Finance Review, Vol. 62 No. 2, pp. 103-116. https://doi.org/10.1108/00214910280001132