The Demand for Specialty-Crop Insurance: Adverse Selection and Moral Hazard

socioeconomic factors as the level of off-farm income, the capital structure of the farm, the
producer's age, her level of education, cooperative membership, the level of crop and geographic
diversification of the farm, or the use of irrigation. Goodwin provides a discussion of how each of
these factors is expected to influence the demand for insurance. Parameter estimates that show a
higher willingness-to-pay for the more inefficient producers suggests moral hazard may present a
problem for fruit and vegetable insurance, while a positive effect of historical yield variability may
indicate the presence of adverse selection in the sense of QKS.⁴ Including yield variation in the
set of explanatory variables captures growers’ dual objective of achieving maximum return
conditional on a level of returns variability. Measures of yield risk and the subjective value of
insurance are described in the following section.

Data and Methods

A nationwide survey of fruit and vegetable growers provides the data for this study. Specifically,
a cluster-sample was defined for each of 32 commodities, both insurable and non-insurable, with a
target response of at least twenty growers per commodity. The number of growers per state was
selected on a grower-number basis, and not by production value. With a focus on explaining
likely aggregate participation rates, sampling by population rather than value of production
provides a better indication of the likely distribution of insurance buyers. The sub-sample selected
for this study include potato, apple, grape, onion, and watermelon growers. Of the total 132
responses, 67 provided useable input and yield data. The survey was mailed in December, 1995
and the responses used in this study collected by April 30, 1996. Data pertain to the 1995 crop

⁴ Where FCIC insurance is not available, some producers still are able to purchase private insurance.
Participation in the recently introduced NAP also indicates a proclivity to insure.

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