Information Asymmetries in Crop Insurance: Evidence from the Philippines

Trial:
Asymmetric information imposes costs on a wide range of markets and may explain why some important markets, such as most agricultural insurance markets, have failed to develop. This trial uses a two-level randomization and incentivized preference elicitation to study asymmetric information in crop insurance in the Philippines. A total of 569 farmers participated in the experiments, which were conducted in 2010-12. Farmers were asked which plot in their portfolio they preferred to be insured and insurance was randomly allocated to farmers and plots in a way that provided for incentive compatibility in the plot choice decision and induced within- and across-farm variability in insurance coverage. The data generated by the choice and randomized experiments were combined with detailed farm- and plot-level survey data, geospatial data on plot and residence location and administrative data from the insurance provider.

Results:
In this first RCT of moral hazard in non-health insurance I find evidence of moral hazard in preventing damage from pests and crop diseases and this effect is particularly strong among farmers who report high trust in the insurance company: for this group harvest losses from this cause double on insured plots. Farmers prefer insurance on plots that are at risk of floods and crop diseases, a sign of classic adverse selection, and plots that are far away from home, a sign of selection on anticipated moral hazard behavior, resulting in 72% higher payouts on preferred plots.