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US farmers’ insurance choices under budget heuristics

Harun Bulut (National Crop Insurance Services (NCIS), Overland Park, Kansas, USA)

Agricultural Finance Review

ISSN: 0002-1466

Article publication date: 14 December 2017

Issue publication date: 12 January 2018

492

Abstract

Purpose

Regional differences in crop insurance uptake have persisted over time. To partly explain this phenomenon, the purpose of this paper is to propose and evaluate a budget constraint (heuristic) effect within the standard expected utility theory (EUT) framework through simulation methods.

Design/methodology/approach

Within the EUT framework, a standard simulation model is used to gain insights into farm insurance decisions when a budget constraint is in effect. The budget constraint is modeled as it has been revealed through the data on farmers’ insurance expenditures. In the simulation analysis, certainty equivalent values are used to rank farm options subject to the revealed budget constraint.

Findings

A budget constraint effect within the EUT framework stands out in explaining the observed regional differences. The proposed explanation is consistent with the historical trends on the ratio of crop insurance expenditure to expected crop value, higher premium rates in regions with lower crop insurance uptake, and the limited turnout for the 2014 Farm Bill’s supplemental area-based crop insurance products. Farmers’ crop insurance choices are found to be mostly constrained-optimal.

Originality/value

This appears to be the first study taking the revealed preferences approach to farmers’ crop insurance choices in a simulation analysis. Some policy implications are drawn and future research avenues are suggested. The findings should be of considerable value to policymakers, academics, bankers, and producers in regard to the design and use of risk management tools.

Keywords

Citation

Bulut, H. (2018), "US farmers’ insurance choices under budget heuristics", Agricultural Finance Review, Vol. 78 No. 1, pp. 152-172. https://doi.org/10.1108/AFR-02-2017-0009

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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