Agricultural & Resource Economics
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Item Asymmetric Information and Alternate Premium Rating Methods in U.S. Crop Insurance: A Comparison of High and Low Risk Regions(2008-04-01) Claassen, Roger L; Just, Richard E.; Agricultural and Resource Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Federally subsidized crop insurance has a long history of underwriting losses. These losses may be due to premium rating procedures that do not account, as fully as possible, for differences in yield loss risk across farms. If farmers understand their own yield loss risk in more detail than is reflected in crop insurance premium rates, an information asymmetry may be leading to adverse selection or moral hazard. Regional differences in underwriting losses suggest that the effect of asymmetric information is relatively large where inter-farm yield variability is also relatively large. An econometric model is used to identify asymmetric information in crop insurance premium rating. A simulation model is used to compare existing crop insurance premium rates to alternative rates calculated using yield loss risk measures based on existing, farm-specific yield history data. Both models are applied to crop/region combinations where inter-farm yield variability is relatively low (non-irrigated corn in the Corn Belt region) and where inter-farm yield variability is relatively high (non-irrigated, continuously cropped wheat in the Northern Plains). Region-wide asymmetric information effects are identified for both regions, but the asymmetric information effect is found to be larger in the high variability region. This difference explains at least part of the inter-regional difference in underwriting losses. The simulation analysis suggests that, on average, across an entire region, premium rates derived from a farm-specific measure of yield variability are closer to actuarially fair rates than RMA premium rates. At a county- and farm-level, however, it is much more difficult to say, with a high level of statistical confidence, whether these alternate premium rates are closer than RMA rates to the actuarially fair rates. To provide a foundation for the crop insurance models, an econometric model of crop yields is estimated and used to separate total yield variation into systematic and random components. Random yield variation is tested against several common distributions, including normal, gamma, and beta. The effect of aggregation on the representation of both systematic and random yield variation is also investigated.Item SERVICE QUALITY AND ASYMMETRIC INFORMATION IN THE REGULATION OF MONOPOLIES: THE CHILEAN ELECTRICITY DISTRIBUTION INDUSTRY(2008-01-03) Melo, Oscar Alfredo; Just, Richard E; Agricultural and Resource Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This study is an enquiry about the role that service quality, asymmetric information, scope of regulation and regulator's preferences play in the regulation of monopolies, with an application to the case of the Chilean electricity distribution industry. In Chapter 1, I present the problem of regulating a monopolist and introduce the special conditions that the electricity sector has. Later I discuss the main characteristics of the electricity system that operates in Chile. The literature on regulation is reviewed in Chapter 2. A special emphasis is given to the problems of quality and information, and the lack of its proper joint treatment. In Chapter 3, I develop four theoretical models of regulation that explicitly consider the regulation of price and quality versus price-only regulation, and a symmetric versus asymmetric information structure where only the regulator knows its true costs. In these models, I also consider the effect of a regulator that may have a preference between consumers and the regulated monopolistic firms. I conclude that with symmetric information and independent of the scope of regulation, having a regulator that prefers consumers or producers does not affect the efficiency of the outcome. I also show that the regulator's inability to set quality, thus regulating only price, leads to an inefficient outcome, away from the first best solution that can be achieved by regulating both price and quality, even with asymmetric information, as long as the regulator does not have a "biased" preference for consumers or the monopolistic producers. If the regulator has a "bias," then the equilibrium will be inefficient with asymmetric information. But the effect on equilibrium price and quality depends on the direction of the effect of quality on the marginal effect of price in demand. More importantly, no closed-form solution can be derived unless drastic simplifications are made. To further investigate the outcome of the models, I use numerical simulation in Chapter 4, assuming flexible functional forms and alternative sets of parameters that represent the scenarios of interest. The results show that when the regulator is biased toward consumers (producers), symmetric information models yield higher (lower) quality except for the most efficient firm. Chapter 5 uses data from the electricity sector in Chile and estimates the price and quality elasticity of demand and finds a positive effect of quality on the price elasticity of demand.