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Farming under Weather Risk

Farming under Weather Risk

Adaptation, Moral Hazard, and Selection on Moral Hazard

(p.77) 3 Farming under Weather Risk
Agricultural Productivity and Producer Behavior
Hsing-Hsiang HuangMichael R. Moore
University of Chicago Press

American Midwest farmers determine cropping patterns and crop insurance in springtime after observing pre-plant precipitation. We examine cropping-pattern adaptation to pre-plant precipitation as a natural experiment, and exploit a quasi-experiment created by a federal program that sharply reduced insurance deductibles to examine risk-taking in cropping pattern as a moral hazard of insurance and selection of insurance coverage in response to the risk-taking. Using a 2001-2014 panel of high-resolution spatial data on land use and weather, we find heterogeneous adaptation in cropping pattern across Illinois, Iowa, Nebraska, and North Dakota. We find evidence of heterogeneous risk-taking in cropping pattern during the federal program in 2009-2011, with farmers in Nebraska and North Dakota more responsive to pre-plant precipitation in both adaptation and risk-taking than farmers in Illinois and Iowa. Using a 2001-2014 panel of county-level data on crop insurance expenditures, we find limited evidence of selection on moral hazard in insurance expenditures in response to pre-plant precipitation. Farmers in Illinois and Iowa increase (decrease) the rate of insurance expenditures on corn when they increase (decrease) corn acres. The interaction of adaptation, moral hazard, and selection on moral hazard reveals incentives, hidden actions, and hidden information in major cropland and insurance markets.

Keywords:   American Midwest, crop insurance, land-use adaptation, natural experiment, pre-plant precipitation

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