Three essays on agricultural risk and insurance

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2008-01-01
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Zhang, Li
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Bruce A. Babcock
David A. Hennessy
Dermot J. Hayes
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Economics

The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).

History
The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.

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1898–present

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  • Department of Economic Science (1898–1910)
  • Department of Economics and Political Science (1910-1913)
  • Department of Applied Economics and Social Science (1913–1924)
  • Department of Economics, History and Sociology (1924–1931)
  • Department of Economics and Sociology (1931–1967)

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Abstract

The general theme of this dissertation is agricultural risk and insurance in the United States. Chapter 2 examines welfare effects of the 2002 farm bill programs and yield insurance as well as their impacts on acreage decision of a representative Iowa farmer. Instead of measuring welfare using expected utility to capture farmers' preferences over risky alternatives, we apply recent advances in decision theory and use prospect theory to measure welfare changes due to government programs. The results indicate that there is no policy distortion to farmers' acreage decisions and farmers' willingness to pay per dollar of program cost is greatest for crop insurance. Given that farmers have crop insurance, the willingness to pay per dollar of program cost is much lower for loan deficiency payments, direct payments, and counter-cyclical payments. Chapter 3 develops a method for determining the aggregate risk of a book of business using hail insurance data. A spatial statistical approach is employed to measure the spatial correlation of hail loss cost. Monte Carlo simulation techniques are employed to simulate hail losses for a wide range of books of business. A regression model is estimated that captures the essence of the Monte Carlo simulation. This model can then be used to quickly estimate the degree of poolability of any given book of business. Chapter 4 turns to weather-based index contracts as alternative risk-management instruments in agriculture. A major concern associated with index contracts is basis risk. To address spatial basis risk, two spatial interpolation approaches, a geo-statistical approach and a Markov random field approach, are compared. The Markov random field approach is preferred because it has a smaller cross-validation prediction mean squared error. A temperature index insurance is presented based on interpolated data. The potential performance of the proposed index insurance is investigated through historical analysis in contract years 1980 to 2005.

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Tue Jan 01 00:00:00 UTC 2008