The Role of area-yield crop insurance program face to the Mid-term Review of Common Agricultural Policy

losses. When defining concave function for gains and convex function for losses, this
theory permits the existence of risk aversion for gains and of risk seeking for losses.

This research work has two objectives. The first objective seeks to characterize the
farmers'  behavior under the mi-dterm review of the Common Agricultural Policy. The

second objective studies the introduction of the area-yield insurance crop program to
reduce the risk originating from the variability of farmers’ income and to compare this
alternative with other agricultural policy alternatives in the context of the mid-term
review of Common Agricultural Policy.

2 - Methodology

Kahneman and Tversky presented a choice model called Prospect Theory in 1979, that
explains the violations of the Expected Utiliy Theory for choice among games with a

reduced number of results. This theory has two key elements: i) a concave function for
gains and a convex function for losses and steeper for losses than for gains; ii) a nonlinear
transformation of the scale of probabilities that overweights the low probabilities and
underweights the moderate and high probabilities. This theory had some comments
relatively to the detection of dominated solutions, the weak specification of the
probability weighting function and the difficulty for applying the games to a high number
of results.

Later Quiggin proposed a new representation of the probabilities in 1982, that instead of
transforming each probability separately, it transforms the cumulative probability
function. This model, called rank-dependent Expected Utiliy, uses an utility function of
the type von Neumann-Morgenstern and a nonlinear transformation of the probabilities,

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