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Abstract

There is a wide consensus in the academic literature that asymmetric information in the form of adverse selection and moral hazard has resulted in sizable financial outlays for governmentsponsored crop insurance programs - ultimately becoming a costly means of transferring risk from farmers to the government. In this analysis we combine simulation and structural modeling techniques to forecast dairy income-over-feed-cost margins and show how asymmetric information problems may drive industry consolidation, production growth, and unforeseen program costs for a recently proposed government-sponsored dairy producer margin insurance program. We conclude by presenting second-best solutions in contract design to the insurance problems of moral hazard and adverse selection.

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