Cooperatives and Area Yield Insurance:A Theoretical Analysis

Pincheira, Pablo and Zeuli, Kimberly (2007): Cooperatives and Area Yield Insurance:A Theoretical Analysis.

Abstract

The purpose of this paper is to theoretically investigate the potential benefits that arise from a cooperative selling a government subsidized area-yield contract (i.e., the Group Risk Plan). The indeminities in area-yield contracts are triggered by a geographically determined yield (e.g., a county-wide yield average) instead of the more conventional individual actual production history. Therefore, an area-yield contract would be appropriate for managing the cooperative's systemic throughput risk. The cooperative would also capture some of the substantial government subsidies that are normally given to a private insurance company. Our primary finding is that farmers should be indifferent when considering the decision to purchase area-yield insurance from a private company or encompass that business in their cooperative. We derive this result for the specific case of costless insurance and assume a Pareto Optimal contract. Under these assumptions, the government subsidies that the cooperative would hope to capture are simply a net deduction in their premiums. In other words, the benefit they capture from the subsidies is the same when they purchase the insurance from an outside firm or internally.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cooperatives, Area Yield Insurance, Optimal indemnity
• Subjects: D - Microeconomics > D6 - Welfare Economics; L - Industrial Organization > L3 - Nonprofit Organizations and Public Enterprise; Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q1 - Agriculture > Q13 - Agricultural Markets and Marketing; Cooperatives; Agribusiness; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty

References

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