Cooperative and Area Yield Insurance: A Theoretical Analysis

The purpose of this paper it to theoretically investigate the potential benefits that arise from a cooperative selling a government subsidized area-yield contract (i.e., the Group Risk Plan). The indemnities in area-yield contracts are triggered by a geographically determined yield (e.g, a country-wide yield average) instead of the more conventional individual actual production history. Therefore, an area-yield contract would be appropriate for managing the cooperative's systemic throughput risk. The cooperative would also capture some of the substantial government subsidies that are normally given to a private insurance company. Our primary finding is that farmers should be indifferent when considering the decisions to purchase area-yield insurance from a private company or encompass that business in their cooperative. We derive this result from the specific case of costless insurance and assume a Pareto Optimal contract. Under these assumptions, the government subsidies that the cooperative would hope to capture are simply a net deduction in their premiums. In other words, the benefit they capture from the subsidies in the same when they purchase the insurance from an outside firm or internally.


Issue Date:
2005
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/31822
Total Pages:
12
Series Statement:
Conference Paper




 Record created 2017-04-01, last modified 2017-04-26

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