| Summary: | Agricultural producers face uncertain agricultural production and market
conditions. Much of the uncertainty faced by agricultural producers cannot be controlled
by the producer, but can be managed. Several risk management programs are available
in the U.S. to help manage uncertainties in agricultural production, marketing, and
finance. This study focuses on the farm level economic implications of the federal risk
management programs. In particular, the effects of the federal risk management
programs on investment, production, and contract design are investigated.
The dissertation is comprised of three essays. The unifying theme of these
essays is the economic analysis of crop insurance programs. The first essay examines
the effects of revenue insurance on the entry and exit thresholds of table grape producers
using a real option approach. The results show that revenue insurance decreases the
entry and exit thresholds compared with no revenue insurance, thus increasing the
investment and current farming operation. If the policy goal is to induce more farmers
in grape farming, the insurance policy with a high coverage level and high subsidy rate
is effective.
In the second essay, a mathematical programming model is used to examine the
effects of federal risk management programs on optimal nitrogen fertilizer use and land
allocation simultaneously. Current insurance programs and the Marketing Loan
Program increase the optimal fertilizer rate 2% and increase the optimal cotton acreage
119-130% in a Texas cotton-sorghum system. Assuming nitrogen is harmful to the
environment and cotton requires higher nitrogen use, these risk management programs
counteract federal environmental programs.
The third essay uses a principal-agent model to examine the optimal contract
design that induces the best effort from the farmer when crop insurance is purchased.
With the introduction of crop insurance, the investorÂs optimal equity financing contract
requires that the farmer bear more risk in order to have the incentive to work hard, which
is achieved by increasing variable compensation and decreasing fixed compensation.
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