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

Arrow, K.J. The Role of Securities in the Optimal Allocation of Risk-bearing. The Review of Economic Studies, Vol. 31, No. 2, (Apr., 1964), 91-96. Borch, K.H. Economics of Insurance. Amsterdam: Elsevier Science Publishers, 1989. Ermoliev Y.M and S. Didrik Flam, Finding Pareto Optimal Insurance Contracts. IIASA Interim Report IR-00-033. June 2000. Mahul, O. Optimum Area Yield Crop Insurance. Amer. J. Agr. Econ. 81 (February 1999): 75-82 Mahul, O. Optimal Insurance Against Climatic Experience. Amer. J. Agr. Econ. 83 (August 2001): 593-604 Raviv, A. The Design of an Optimal Insurance Policy. Amer. Econ. Rev. 69 (March 1979):84-96 Young, C.E., M.L. Vandeveer, and R.D. Schnepf. "Production and Price Impacts of US Crop Insurance Programs." Amer. J. Agr. Econ. 83(Number 5, 2001):1196-1203. Zeuli, K.A. New Risk-Management Strategies for Agricultural Cooperatives. Amer. J. Agr. Econ. 81 (Number 5, 1999): 1234--1239.