ECON 315 Lecture Notes - Lecture 17: Moral Hazard, Adverse Selection, Crop Insurance
23 Jun 2017
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Perfectly competitive market this is not a problems. Two farmers, a and b: plant corn. 50% chance things go well . 50% chance things go badly sh. Under cases 2 and 3: can come to an agreement to divide total profits. Aka reducing probability of having a really bad year. In the example above it made economic sense for farmers a and b to insure each other. What prevents farmers from yielding to this temptation. Farmers can only insure each other if: They know themselves relatively well (close together, relatives) It means that they only have limited scope for insurance. In practice most insurance seems limited to bilateral relationship, not a pool: Not very well designed to deal with large shock such as illness. Forbes called micro-insurance an potential natural market . They cannot pay much but there are many of them. They should be significant money to be made. Farmers demand less insurance than is optimal.
