Abstract

We develop a behavioral target-income framework for analyzing farmers’ crop insurance coverage level decisions under the explicit risk of not breaking even. In this framework, expected break-even revenue serves as a salient income target, and we assume that farmers are averse to falling below that threshold. We further introduce the concept of the break-even coverage level (BECL), defined as the coverage level at which the insured revenue equals the expected break-even revenue. Evaluating BECL feasibility within the current FCIP design shows that the farmers who have the least access to ex ante break-even coverage are also those most likely to fall short of break-even. Moreover, purchasing such coverage may be suboptimal if i) the BECL exceeds the coverage levels that maximize premium subsidies or ii) farmers incur additional disutility from paying premiums beyond the direct reduction in net income. Data from a recent online farmer survey reveal a pronounced “bunching” of choices exactly at the BECL, along with an asymmetric decline in uptake for other coverage levels as the distance from the BECL increases. Overall, farmers display a strong preference for securing ex ante break-even revenue through crop insurance. Analysis of self-reported attitudes toward break-even outcomes and premium expenses also supports predictions regarding how these behavioral factors influence break-even coverage decisions.