The role of probability information and choice complexity in demand for crop insurance under climate change

This study examines how probabilistic information about increasing extreme weather events under climate change influences farmers' demand for crop insurance. Using split samples, the effect of a probability attribute to describe future extreme weather events is tested in a choice experiment, accounting for attribute attendance and choice complexity. Probability neglect is expected under existing low probability-high impact conditions, and attribute non-attendance is indeed highest for this attribute.

The particular set-up of the choice experiment by specifying insurance policy characteristics allows us to also draw some conclusions with respect to the institutional-economic terms and conditions of extending the existing crop insurance. Foremost important is that farmers strongly prefer voluntary participation and are willing to pay extra for this. Compliance conditions to reduce moral hazard hardly play a role in the estimated choice models. Farmers do not seem to care much about facing external supervision, having to meter their water use or undergoing training to reduce their risks. Hence, moral hazards do not seem to be apparent. Farmers are, however, very sensitive to the premium they will be asked to pay.