Pollution liability insurance and corporate environmental compliance in China

Alecia Waite Cassidy, Fangjian Wu and Yiyuan Zhang

No 1100, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: This study examines the effect of a pollution liability insurance mandate on corporate environmental compliance in Shenzhen, China. We employ a triple differences design, comparing electroplating and circuit board manufacturing firms, mandated to purchase insurance, to industries and a neighboring city without the mandate. Results show a 0.48 reduction in annual environmental violations per firm (a 72% decrease). Only about half of firms comply. Within the Shenzhen electroplating and circuit board industry, we find that insured firms violate more than uninsured firms (an increase of about 0.09 annual violations). We find suggestive evidence that this increase is driven by moral hazard rather than adverse selection. Taken as a whole, our findings demonstrate that premium-based incentives effectively counteract market failures due to asymmetric information, increasing environmental compliance on net.

Keywords: Environmental compliance; liability insurance; moral hazard; adverse selection (search for similar items in EconPapers)
JEL-codes: G22 K32 Q52 Q53 Q58 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-cna, nep-ene and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:306831

DOI: 10.4419/96973278

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