Moral hazard: the effect of insurance on risk and efficiency

While there is a large body of literature investigating the effect of crop and livestock insurance on input and yield, limited attention has been paid to the effect of insurance on efficiency. This article investigates how insurance affects technical efficiency and whether insurance alters the utilized input quantity to a riskier bundle using the Norwegian salmon farming industry as a case. The results illustrate that insurance has an enhancing effect on production and efficiency and changes the utilized input mix-a well-insured farmer uses more feed and less capital and labor than a less-insured farmer. When linking this to each input's risk profile, the results indicate that insurance will induce the use of the risk-increasing factor (feed) and reduce the use of the risk-decreasing factors (labor and capital)-thereby increasing production risk and indicating moral hazard.