An examination of the existence and consequences of asymmetric information in multiple peril crop insurance programs

This dissertation reports investigations of asymmetric information in the U.S. Multiple Peril Crop Insurance (MPCI) program. This program has been strongly criticized for failing to maintain actuarial soundness or to attract acceptable levels of producer participation. Previous research has suggested that two forms of asymmetric information--adverse selection and moral hazard--may hinder the actuarial soundness of and the demand for MPCI, however little empirical evidence of either adverse selection or moral hazard has been provided. This research develops theoretically-based empirical models to test for the existence and measure the magnitude of moral hazard and adverse selection. These models are then applied to data for Kansas wheat farms. Additionally, a measure of asymmetric information is incorporated into a model of MPCI participation by Kansas wheat farms.;Chapter I provides an overview of the program's actuarial soundness and participation during the 1980's. Additionally, previous research investigating these issues is discussed.;In Chapter II the history and structure of the MPCI program is described. The history of multiple peril crop insurance in the U.S. since the early 1900's is reviewed. Specific attention is given the program as revised in 1980. This discussion includes explanations of the provisions of the contract offered to producers and the rate setting process used by the FCIC.;The first essay, Chapter III, reports an analysis in which conditional beta distributions were fitted to producer level yield data in a test for the presence and magnitude of both adverse selection and moral hazard among Kansas wheat producers. Little evidence of adverse selection is found, but moral hazard is indicated in five of nine crop reporting districts. Chapter IV reports a further examination of moral hazard which distinguishes moral hazard with hidden action from moral hazard with hidden knowledge. The results suggest that moral hazard with hidden action is more prevalent in the Kansas wheat program. In Chapter V the MPCI participation decision is examined using producer level data for the sample of Kansas wheat producers. Conclusions drawn from this essay suggest that producers do consider the expected cost and benefit of participation and that there is a strong tendency among producers to remain either in or out of the MPCI program over time. Also, asymmetric information is found to significantly influence participation, in that producers who perceive errors in rates offered to them respond in a manner which influences actuarial soundness.