Spatial producer heterogeneity in crop insurance product decisions within major corn producing states

Abstract

Purpose

The purpose of this paper is to examine the spatial components of producer heterogeneity in crop insurance product selection among US corn producers and identifies neighborhood spillover or agent marketing effects in these decisions.

Design/methodology/approach

County‐level insurance and yield data are used to demonstrate that a gradual shift from yield‐based insurance to revenue‐based insurance has spatial patterns. Conventional risk variables such as yield variability, price variability, prevalence of irrigation, other crops, and yield‐price relationships play an important role in this shift and are consistently estimated only when spatial components are included. A spatial random effects model is used to also identify the impact of spatial lag effects, which include neighborhood spillover and agent marketing effects, on the share of corn acres insured with revenue‐based plans vs yield‐based plans.

Findings

Theoretically consistent variables associated with risk are found to significantly influence the choice between crop revenue and yield insurance. Non‐linear parameters identify the region‐specific effects from changes in irrigation, yield price correlation, and the prevalence of corn production on insurance decisions. In addition, spatial components such as the decisions made by nearby producers and marketing drives are also found to influence decisions. These results may demonstrate the relative influence of trusted sources, such as nearby producers and insurance agents, on insurance decisions.

Originality/value

Traditional risk variables are consistently estimated by controlling for spatial heterogeneity. This study also reveals the propensity of producers to rely on the opinions of other producers or agents that they know.

Citation

Adhikari, S., Belasco, E.J. and Knight, T.O. (2010), "Spatial producer heterogeneity in crop insurance product decisions within major corn producing states", Agricultural Finance Review, Vol. 70 No. 1, pp. 66-78. https://doi.org/10.1108/00021461011042648