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Abstract The economic theory of contracts is applied to agricultural insurance to show that, given full information, Pareto‐optimal insurance contracts are actuarially fair, provide full coverage, and differ for each individual. The information problems of moral hazard and adverse selection prevent Pareto optimality from being attained. Several “second‐best” solutions to these problems are applied to agricultural insurance. It is shown that information collection and the application of contract design principles are “second‐best” solutions which may achieve the benefits of insurance at less cost than the current practice of public subsidies.
Nelson et al. (Sat,) studied this question.
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