An assumption on the market failure of agricultural insurance

Agricultural Insurance in China Started in 1930s, but it had little resemblance to the limited insurance categories that are available to the Chinese farmers now. Following Wright and Hewitt (1994), many Chinese researchers follow the assumption of risk preference of Chinese farmers when analyzing the fact that there is the lack of interests of Chinese farmers in agricultural insurances, but few has touched the evolution of farmers risk preference with their income levels. We have conducted a four-province-survey to categorize the farmers' risk preference and their income level, and used Arrow-Pratt measurement to characterize the changes of risk preferences in different income levels. Our initial finding is that the lack of demand for agricultural insurance in China results from the inadequate income in most rural areas, and the farmers will become more risk aversion once their income reaches a threshold level. Therefore, it is left to the government to jump-start the initial agricultural insurance program in China. Given the positive externality of the agricultural insurance, we predict that the government sponsored agricultural insurance program is a more efficient way of using government transfer to farmers than direct production related support.