Testing the Existence of Adverse Selection in
Subsidized Crop Insurance Markets in China

HOU Lingling, Dana LK Hoag, MU Yueying

Department of Agricultural and Resource Economics
Colorado State University, Fort Collins
Department of Economics and Management, China Agricultural University

Abstract:
Subsidized for crop insurance for corn in Miyun County, China should make insurance more attractive to farmers. Nevertheless, the insurance program will not be efficient or sustainable if its economic value is not clear. One indicator of efficiency is adverse selection, which should occur if farmers understand the program. Adverse selection occurs when those with the highest expected payout purchase insurance, and people with low risk opt out, raising the cost and inefficiency of the program’s ability to pool and distribute risks. We test for adverse selection using nonparametric tests and Logit regression. The results show that the expected subsidy level and school years received by head of household significantly, and positively, affect whether farmer purchase insurance. However, there is no existence of adverse selection. This is not likely due to ability of government to control adverse selection in the insurance contracts. On the contrary, policy makers should consider that this is a signal that the insurance contracts are imprecise and poorly understood which reduces ability to spread risk as expected. Farmers have little information about the insurance contracts and probably view corn insurance as a lottery instead of a tool to recover from loss.

Keywords: crop insurance, adverse selection, rural China