Recency effects and participation at the extensive and intensive margins in the U.S. Federal Crop Insurance Program

Abstract

Participation in the U.S. Federal Crop Insurance Program (FCIP) has increased over time at both extensive (insured acres) and intensive (coverage level) margins, but there are clear spatio-temporal variations in these trends. Farmers’ decisions are likely influenced by recent indemnity or weather experiences (i.e., recency effects). We develop a model to identify two channels through which recent adverse weather experiences may affect participation, one where the weather shocks directly affect participation and the other where they affect participation through indemnity payouts. With historic FCIP data over the period 2001–2017, we use parametric and non-parametric methods to estimate these effects. At both extensive and intensive margins, higher past indemnities are found to encourage participation. This provides evidence that prior adverse weather shocks work indirectly. Less evidence is found in favour of direct weather effects. We also find that the increase in participation due to indemnities peaks in the year following a loss.

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Notes

  1. 1.

    Detailed data are available at https://legacy.rma.usda.gov/data/sob.html.

  2. 2.

    Indemnity ratio, as defined above, depends on intensive margin choices. All else being equal, the indemnification rate will be higher when the average coverage level is higher.

  3. 3.

    The 12 states are Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, North Dakota, Nebraska, Ohio, South Dakota and Wisconsin.

  4. 4.

    More generally, insurance studies have typically covered either the intensive margin or the extensive margin but not both. See analysis by Geruso et al. (2019), on equilibrium under adverse selection for reasoning on why considering these margins separately may be problematic.

  5. 5.

    Detailed data set variable lists are available at https://www.rma.usda.gov/-/media/RMAweb/SCC-SOB/State-County-Crop-Coverage/sobsccc_1989forward-pdf.ashx?la=en.

  6. 6.

    Detailed data set variable lists are available at https://www.rma.usda.gov/SummaryOfBusiness/CauseOfLoss.

  7. 7.

    Detailed data are available at https://quickstats.nass.usda.gov/.

  8. 8.

    The conversions are 10 °C = 50 °F, 30 °C = 86 °F, 32.2 °C = 90 °F.

  9. 9.

    Detailed data are available at https://www1.ncdc.noaa.gov/pub/data/cirs/climdiv/, accessed on 06 September 2018.

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Acknowledgements

This research was partly funded by Michigan State University’s Elton R. Smith Chair of Food and Agricultural Policy. Without implication, the authors benefitted from comments made by Scott Swinton and seminar participants at AAEA Meetings—Chicago 2017, Michigan State University 2019, and SCC-76 Kansas City 2019—as well as comments from the journal editor and referees.

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Che, Y., Feng, H. & Hennessy, D.A. Recency effects and participation at the extensive and intensive margins in the U.S. Federal Crop Insurance Program. Geneva Pap Risk Insur Issues Pract 45, 52–85 (2020). https://doi.org/10.1057/s41288-019-00147-5

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Keywords

  • Coverage level
  • Direct and indirect responses
  • Event study
  • Recency bias
  • Weather shocks