Essays On The Source Measurement And Management Of Agricultural Market Risk

Author : Huang Chen
Publisher :
ISBN 13 : 9780438629554
Total Pages : pages
Book Rating : 4.6/5 (295 download)

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Download or read book Essays in the Economics of Risk Management written by Huang Chen and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation is motivated by two important policy changes in China's agricultural sector. First, the market-oriented land reform policies, such as strengthening individual property rights, are expected to raise productivity through multiple mechanisms including increased investment demand and land consolidation, which would take advantage of scale economies. Second, the subsidization and promotion of agricultural insurance are expected to increase agricultural investment by stabilizing farmers' income and expanding credit supply. In this dissertation, I explore a range of theoretical and empirical questions through the lens of the economics of risk to understand the potential impacts of the policies and generate insights for future policy design. The first study, "Agricultural Risk, Insurance, and the Inverse Relationship between Farm Size and Productivity", examines the potential for unintended adverse impacts of land consolidation on farm productivity and evaluates the degree to which insurance can mitigate the adverse impacts. Land consolidation may lower productivity and output if, as found commonly in the literature, an inverse relationship exists between farm-size and yield. I first develop a farm-household model that identifies an "Income Share Effect" (ISE), which provides a new risk-based explanation rooted in the Chinese context for the inverse relationship. In China, the prevalence of very small plots implies that most farm households have surplus labor and dedicate significant time to non-farm activities. As land size increases, farmers shift labor away from low-risk, off-farm activities and devote more time to risky farming. Land consolidation and the creation of a class of commercial family farms thus increases the share of household income at risk and leads larger farmers to behave more conservatively in their farming decisions. In the absence of insurance markets, the land reform policies may thus achieve the goal of land consolidation but at a cost of lower productivity. I then show that the introduction of perfect crop insurance offsets the inverse relationship as larger farmers are able to protect their specialized agricultural portfolio. I empirically test for the existence of the inverse relationship in the absence of insurance. I find that a 1 mu increase in farm size causes a 1.6 yuan/mu decrease in the value of yields. This implies that if average land size increases from the sample mean in 2013, which is 67mu/farm, to 100mu/farm in China, total production would decrease by 3%, a considerable magnitude when talking about national food supply. Finally, I show that the availability of crop insurance has a significant positive impact on productivity, allowing farmers to “recover” the productivity lost due to the inverse relationship. Because of the limitations of conventional agricultural insurance, China's government is considering promoting an index insurance market. However, based on experiences from other countries, low take-up rates could be an obstacle in developing this market. I investigate the issue of demand for index insurance in Chapter 3: "Theoretical Explanations of Low Take-up Rates of Weather Index Insurance". I use an expected-utility framework to explore the role of three determinants of insurance demand: subjective beliefs about weather risk, index quality as measured by basis risk (the risk of contractual non-performance) and, farmer heterogeneity in vulnerability to weather risk. The model clarifies how combinations of contract quality and farmer vulnerability map into welfare gains for and insurance demand by farmers. I then use 52 years of China's agricultural production and weather data to simulate demand and welfare impacts of the introduction of an index insurance market in 26 provinces.