Goodwin Analyzes the ‘Moral Hazard’ of US Crop Insurance
An article titled “Moral Hazard and Subsidized Crop Insurance” by ARE Professor Barry Goodwin and collaborators Shenan Wu and Keith Coble has been accepted to Agricultural Economics, the journal of the International Association of Agricultural Economists. The journal serves the IAAE by disseminating some of the most important research results and policy analyses in Agricultural and Resource Economics. This article’s publication coincides with the 50th anniversary of the journal.
Goodwin, Wu and Coble assess the US federal crop insurance program and its effect on agent behavior and insurance payouts to farmers. Because crop insurance is a milti-billion dollar federal program, it is important to understand how funds are spent and whether or not the crop insurance program is subsidizing farmers in an unintended manner.
Along with adverse selection, moral hazard is one of the major hurdles that private and public insurance plans must contend with. Moral hazard occurs if risks are endogenous to a producer’s behavior and if the insurer is unable to properly monitor the insured. We review the role of moral hazard in the US crop insurance program. We conduct an empirical analysis of one important aspect of the US crop insurance program—Prevented Planting. This provision provides indemnity payments if conditions are not suitable for planting. The program has been the subject of considerable controversy, especially during 2019, when the rate of claims is expected to be especially high. Because loss adjustors may encounter difficulties in assessing the weather conditions associated with prevented planting claims, the program is susceptible to moral hazard. We consider the extent to which prevented planting claims may be endogenous to prices. We find significant evidence of moral hazard. The likelihood of prevented planting claims increases as the expected market price decreases or as fertilizer costs increase for corn and soybeans in the Prairie Pothole Region and for grain sorghum and cotton in all states.