The Demand for Specialty-Crop Insurance: Adverse Selection and Inefficiency

The twin problems of moral hazard and adverse selection are often blamed for the lack of insurance for many fruits and vegetables. This paper develops an alternative method of testing for adverse selection that uses a two-stage approach to determine the effects of technical inefficiency on the demand for insurance. With this approach, technical inefficiency is interpreted as an indicator of adverse selection. Because there is no active insurance market for many specialty crops, and thin markets for those that are insurable, a contingent valuation approach is used to obtain the data necessary to estimate the demand for three different types of insurance. The results suggest adverse selection may be a deterrent to the viability of extending the breadth of specialty crop insurance products.