A Comparison of Hypothetical Risk Attitude Elicitation Instruments for Explaining Farmer Crop Insurance Purchases

Summary

This study considers three alternative measures of farmer risk tolerance to assess how well each measure explains farmers' actual decision to purchase crop insurance.

Situation

Crop insurance is a critical risk management tool for farmers who wish to protect themselves against yield and revenue losses, smooth income over time, and help themselves remain a viable operation after catastrophic events. Despite government subsidies for the purchase of crop insurance many farmers fail to purchase insurance to cover catastrophic revenue losses. A number of factors have been proposed to explain why some farmers do not purchase insurance including their perceptions of the probability of crop losses, their tolerance for risk, mispricing of crop insurance, and insufficient information about insurance products. Given the increasingly important role of crop insurance in the farm safety net, improved knowledge of these drivers of underinsurance is critical.

Response

To better understand the relationship between farmer risk tolerance and the decision to purchase crop insurance, three alternative hypothetical measures from the economics literature were tested. A sample of apple and grape farmers completed a detailed survey of their farming operation and insurance decisions and engaged in three decision making scenarios to assess their risk tolerance.

Impact

Results from the study indicate that a simple hypothetical gamble scenario where farmers considered potential farm revenue gains/losses was highly correlated with the decision to purchase crop insurance. This method to measuring farmer risk tolerance is easy and fast to implement and offers extension agents and researchers a simple validated tool to assess farmer risk tolerance.

State Issue

Agricultural Profitability and Sustainability

Details

• Year: 2016
• Geographic Scope: International
• County: Clarke
• Program Areas:
  • Agriculture & Natural Resources