SUPPLY RESPONSE TO AGRICULTURAL INSURANCE - RISK REDUCTION AND MORAL HAZARD EFFECTS

This paper examines the consequences of agricultural insurance for expected supply. The effect of insurance is shown to decompose into a 'risk reduction' effect as well as a ''moral hazard' effect. The direction and magnitude of these effects depend on the parameters of the insurance contract, producer's risk preferences, and the underlying technology. Two models are considered for this purpose. In the first model, widely employed in the literature, a producer controls only one input. The second model uses a dual approach to extend the results to the case where a producer controls multiple inputs.