Effects of Crop Insurance on Productivity and Risk Management: a Case Study of Fars Province

The objectives of crop insurance are to enhance the farmer's income level, decreasing income fluctuations, increasing investment security in agriculture and, thereby, more efficient use of agricultural inputs. So, in present study, effects of crop insurance on farmer's production efficiency, their attitudes toward risk as well as agricultural demand function were estimated and evaluated. Also, the probable affects of systematic risk, adverse selection and moral hazard on the efficiency of crop insurance were investigated. Data were collected from a sample of 87 insured and 90 uninsured potato farmers in Eghlid region by multistage cluster sampling method in 2009-10. Farmer's technical efficiency and attitudes toward risk were estimated by the stochastic frontier production function and ELCE method, respectively. Agricultural crop insurance demand function was estimated by using Goodwin (1993) model. Also, existence of systematic risk, adverse selection and moral hazard were investigated by Miranda and Glauber (1997) model. Results of the study revealed that, insurance effect on production of potato farmers was not positive. However, it was effective in increasing farmer's attitude toward risk. Investigating for adverse selection and moral hazard showed that they were most likely the main causes of negative effect of insurance. Results also revealed the existence of a weak systematic risk which is especially important in the case of private insurance. Demand function estimation showed the positive effects of farmer's personal and managerial characteristics such as degree of risk aversion, education level, experience, age and ownership on their demand for crop insurance.