Risk-Based Pricing and Risk-Reducing Effort: Does the Private Insurance Market Reduce Environmental Accidents?

Haitao Yin, Howard Kunreuther and Matthew White

No 15100, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines whether risk-based pricing promotes risk-reducing effort. Such mechanisms are common in private insurance markets, but are rarely incorporated in government assurance programs. We analyze accidental underground fuel tank leaks--a source of environmental damage to water supplies--over a fourteen-year period, using disaggregate (facility-level) data and policy variation in financing the cleanup of tank leaks over time. The data suggest that eliminating a state-level government assurance program and switching to private insurance markets to finance cleanups reduced the frequency of costly underground fuel tank leaks by more than 20 percent. This corresponds to more than 3,000 avoided fuel-tank release accidents over eight years in one state alone, a benefit in avoided cleanup costs and environmental harm exceeding $400 million. These benefits arise because private insurers mitigate moral hazard by providing financial incentives for tank owners to close or replace leak-prone tanks prior to costly accidents.

JEL-codes: D8 H23 K32 (search for similar items in EconPapers)
Date: 2009-06
New Economics Papers: this item is included in nep-env and nep-ias
Note: EEE IO LE PE
References: View references in EconPapers View complete reference list from CitEc
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Published as “Risk-Based Pricing and Risk-Reducing Effort: Does the Private Insurance Market Reduce Environmental Accidents?” (with Haitao Yin and Matthew White), Journal of Law & Economics, Vol. 54, No. 2 (May 2011), pp. 325-363

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