Using a Farmer’s Beta for Improved Estimation of Expected Yields
Effects of sampling error in estimation of farmers’ mean yields for crop insurance purposes and their implications for actuarial soundness are explored using farm-level corn yield data in Iowa. Results indicate that sampling error, combined with nonlinearities in the indemnity function, leads to empirically estimated insurance rates that exceed actuarially fair values. The difference depends on the coverage level, the number of observations used, and the participation strategy followed by farmers. A new estimator for mean yields based on the decomposition of farm yields into systemic and idiosyncratic components is proposed, which could lead to improved rate-making and reduce adverse selection.
Carriquiry, Miguel A.; Babcock, Bruce A.; Hart, Chad E., Using a Farmer's Beta for Improved Estimation of Expected Yields, Journal of Agricultural and Resource Economics, Volume 33, Issue 1, April 2008, Pages 52-68
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