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 la cking or based on inadequate county-level data. This article uses nationwid e farm-level data on corn and soybeans to decompose incentives for particip ation in U.S, multiple peril crop insurance into a risk-aversion incentive (the conventional justification for insurance), an actuarial or subsidy inc entive (reflecting government subsidization), and an asymmetric information incentive (which reflects farmers' information advantage). Results show th at the risk-aversion incentive is small. Farmers participate in crop insura nce primarily to receive the subsidy or because of adverse selection possib ilities.