Description: Job Market Practice Talk Xuche Gong (Iowa State University)

Location: 368A Heady Hall

Title: Insure at the Break-even: A Target Income Model of Farmers’ Crop Insurance Choices

Abstract: In the United States, over 80% of the planted acres for major crops are insured under the Federal Crop Insurance Program. However, farmers often select insurance coverage levels below those that maximize their expected utility (Du et. 2017). This paper addresses this discrepancy by introducing a target income model concerning farmers’ break-even revenue. The model postulates that farmers strategically select coverage levels to closely match their break-even point, balancing two key factors: coverage levels well below the break-even point increase the risk of insolvency, while coverage levels significantly above it can lead to disproportionately high insurance premiums without commensurate risk protection benefits. Survey data from over 700 farmers substantiates this model, revealing that coverage choices are heavily influenced by these considerations. Farmers prioritizing break-even revenue coverage generally opt for levels at or above their break-even point. In contrast, those focusing on lower premiums tend to choose below the break-even point. Farmers who emphasize both factors tend to choose within a 5-percentage point range around their break-even coverage levels. These farmers make up about 50% of the survey sample. These findings imply that, for many farmers, the primary role of insurance is as a safeguard against financial ruin rather than as a tool to maximize expected utility.