Optimum Area Yield Crop Insurance

This article considers the problem of the optimal design of crop insurance when the indemnity is based upon the aggregate yield of a surrounding area. The optimal area yield crop insurance contract depends on the individual beta coefficient which measures the sensitivity of farm yield to area yield. Indemnity payments are made whenever the realized area yield is lower (higher) than a critical yield if the beta coefficient is positive (negative). The optimal contract contains a “disappearing deductible” if the beta coefficient is higher than unity. Copyright 1999, Oxford University Press.