Description: Department Seminar

Location: 368A Heady Hall

Contact: John Crespi

Title: Information Frictions in Crop Insurance Choices

Abstract: This paper examines how informational and switching frictions drive suboptimal choices in the U.S. federal crop insurance program. We estimate a structural model of insurance choice that incorporates rational inattention toward indemnities and state-dependent switching costs. Using administrative data for 322,862 farms, we identify these frictions from the asymmetric substitution patterns between transparent, costless premiums and cognitively demanding expected indemnities. Our results demonstrate that information frictions are the primary source of inefficiency: eliminating them raises producer welfare by 44 percent, nearly reaching the first-best benchmark. In contrast, switching costs account for a negligible share of total welfare loss. We identify yield predictability as a central determinant of information costs, finding that a counterfactual with perfect forecast accuracy closes over 60 percent of the welfare gap. These findings suggest that improvements in publicly provided forecasts and decision-support tools can generate substantial welfare gains without altering subsidy rates or contract design environments.