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

Journal of Law and Economics, Vol. 54, No. 2, 2011

Posted: 11 Sep 2008 Last revised: 29 Sep 2013

See all articles by haitao Yin

haitao Yin

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Howard Kunreuther

University of Pennsylvania - Operations, Information and Decisions Department; National Bureau of Economic Research (NBER)

Matthew W. White

University of Pennsylvania - Business & Public Policy Department; National Bureau of Economic Research (NBER)

Date Written: September 9, 2008

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 leaking tanks 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 storage tanks 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, replace or upgrade leak-prone tanks prior to accidents that require costly cleanup.

Keywords: Environmental Regulation, Risk-based Pricing, Insurance, Public Fund, Underground Storage Tank

JEL Classification: K32, L51, M21, G22

Suggested Citation

Yin, Haitao and Kunreuther, Howard C. and White, Matthew Wallace, Risk-Based Pricing and Risk-Reducing Effort: Does the Private Insurance Market Reduce Environmental Accidents? (September 9, 2008). Journal of Law and Economics, Vol. 54, No. 2, 2011. Available at SSRN: https://ssrn.com/abstract=1265592

Haitao Yin (Contact Author)

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.535 Fahuazhen Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China

Howard C. Kunreuther

University of Pennsylvania - Operations, Information and Decisions Department ( email )

3730 Walnut Street
558 & 559 Jon M. Huntsman Hall
Philadelphia, PA 19104-5340
United States
212-854-0423 (Phone)
215-573-2130 (Fax)

National Bureau of Economic Research (NBER)

Matthew Wallace White

University of Pennsylvania - Business & Public Policy Department ( email )

The Wharton School
3100 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104-6372
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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