Adverse selection in crop insurance: Actuarial and asymmetric information incentives

Adverse selection is often blamed for crop insurance indemnities exceeding premiums plus subsidies. However, nationwide empirical evidence has been lacking or based on inadequate county-level data. This article uses nationwide farm-level data on corn and soybeans to decompose incentives for participation in U.S, multiple peril crop insurance into a risk-aversion incentive (the conventional justification for insurance), an actuarial or subsidy incentive (reflecting government subsidization), and an asymmetric information incentive (which reflects farmers' information advantage). Results show that the risk-aversion incentive is small. Farmers participate in crop insurance primarily to receive the subsidy or because of adverse selection possibilities.