Crop Insurance and Pesticides in French agriculture: an empirical analysis of multiple risks management

This paper investigates the determinants of rapeseed hail insurance and chemical input decisions using individual panel data set of French farms covering the period from 1993 to 2004. Economic theory suggests that insurance and prevention decisions are not independent due to risk reduction and/or moral hazard effects. We propose a theoretical framework that integrates two statistically independent sources of risk faced by farmers of our sample -hail risk and pest risk. Statistical tests confirm that chemical and insurance demands are endogenous to each other and simultaneously determined. An econometric model involving two simultaneous equations with mixed censored/continuous dependent variables is thus estimated for rapeseed. Estimation results show that rapeseed insurance demand has a positive and significant effect on pesticide use and vice versa. Insurance demand is also positively influenced by the yield's coeficient of variation and the loss ratio, and negatively influenced by proxies for wealth (including CAP subsidies) and activity diversification.