Estimating the Effect of Crop Insurance on Input Use when Insured Farmers are Monitored

Monitoring is one way to alleviate the moral hazard problem rampant in crop insurance programs. Lacking data on monitoring, we test the effectiveness of monitoring on reducing moral hazard behavior indirectly. We first propose a theoretical model that takes into account several features of the Philippines crop insurance program. Our model predicts that if monitoring is effective, then crop insurance should have a positive effect on input use. Our empirical analysis of a survey dataset of corn farmers in the Philippines confirms this theoretical prediction and lends empirical support to the hypothesis that monitoring is effective in reducing moral hazard behavior by the farmers.