SUPPLY RESPONSE TO AGRICULTURAL INSURANCE - RISK REDUCTION AND MORAL HAZARD EFFECTS

This paper examines the consequences of agricultural insurance for exp ected supply. The effect of insurance is shown to decompose into a 'ri sk reduction' effect as well as a ''moral hazard' effect. The directio n and magnitude of these effects depend on the parameters of the insur ance contract, producer's risk preferences, and the underlying technol ogy. Two models are considered for this purpose. In the first model, w idely employed in the literature, a producer controls only one input. The second model uses a dual approach to extend the results to the cas e where a producer controls multiple inputs.