| This dissertation investigates the concept of area yield crop insurance and extends the empirical evidence for its effectiveness in reducing an individual producer's yield risk. The empirical model is used to examine the policy implication of providing premium subsidies designed to encourage more producers to participate in the Federal crop insurance program.; The first part of the study involved eliciting perceptions of an area yield crop insurance program called Group Risk Plan (GRP) crop insurance. Focus group interviews with producers and insurance agents revealed confusion and uncertainty about GRP, but also excitement about the potential benefits of the new product. Major themes revealed in the focus groups included that GRP fits a niche market of producers, protection levels are attractive in terms of cost, and the simplicity of GRP. Concerns were expressed over the calculation of county yields, the stability of the program, and the possibility of an individual loss.; The second part of the study applied a theoretical framework to derive the optimal level of risk reduction under area yield insurance and compare the results to individual yield crop insurance. Mean-variance analysis was used to derive the optimal levels for corn producers in Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri and Ohio. Results suggest that area yield crop insurance reduces risk for the majority of producers examined and that it outperforms individual yield insurance in most cases. The producer's individual beta, sensitivity of individual yield to changes in area yield, indicates how well area yield insurance will work for a producer. Assuming a critical beta of 0.5 the producer will scale protection equal to his or her individual beta.; The third part of the study examines the a particular policy implication of adding a premium subsidy to both types of insurance. Producers were assumed to maximize their expected indemnity. A ratio measuring the expected net indemnity as a percentage of expected return was derived and the resulting distribution plotted. The distribution plots suggest that increased participation is encouraged and those producers with high expected net indemnities benefit more from the subsidies. |
