OPTIONAL UNIT POLICY IN CROP INSURANCE

Utilizing ordered logit we examine the presence of two kinds of asymmetric information-adverse selection (intertemporal variability) and moral hazard (interspatial and/or residual variability) as revealed by the choice of optional units in Federal crop insurance utilizing Risk Management Agency's 1996-2000 cotton yield and loss data files. Further, a tobit model is estimated to examine the factors explaining the loss cost ratio from Risk Management Agency perspective. Potential costs of adverse selection and/or moral hazard in optional unit provision are estimated to be as high as $180 million in US cotton over the 1996-2000 period. Keywords: Adverse Selection, Moral Hazard, Optional Unit Policy, Crop Insurance, U.S. Cotton, Logit and Tobit models.