Deepwater Drilling: Law, Policy, and Economics of Firm Organization and Safety

Resources for the Future Discussion Paper No. 10-65

55 Pages Posted: 27 Jan 2011

See all articles by Mark A. Cohen

Mark A. Cohen

Vanderbilt University - Strategy and Business Economics; Vanderbilt University - Law School; Resources for the Future

Madeline Gottlieb

Resources for the Future

Joshua Linn

Resources for the Future

Nathan D. Richardson

University of South Carolina - Law Library; Resources for the Future

Date Written: January 12, 2011

Abstract

Although the causes of the Deepwater Horizon spill are not yet conclusively identified, significant attention has focused on the safety-related policies and practices - often referred to as the safety culture - of BP and other firms involved in drilling the well. This paper defines and characterizes the economic and policy forces that affect safety culture and identifies reasons why those forces may or may not be adequate or effective from the public’s perspective. Two potential justifications for policy intervention are that: a) not all of the social costs of a spill may be internalized by a firm; and b) there may be principal-agency problems within the firm, which could be reduced by external monitoring. The paper discusses five policies that could increase safety culture and monitoring: liability, financial responsibility (a requirement that a firm’s assets exceed a threshold), government oversight, mandatory private insurance, and risk-based drilling fees. We find that although each policy has a positive effect on safety culture, there are important differences and interactions that must be considered. In particular, the latter three provide external monitoring. Furthermore, raising liability caps without mandating insurance or raising financial responsibility requirements could have a small effect on the safety culture of small firms that would declare bankruptcy in the event of a large spill. The paper concludes with policy recommendations for promoting stronger safety culture in offshore drilling; our preferred approach would be to set a liability cap for each well equal to the worst-case social costs of a spill, and to require insurance up to the cap.

Keywords: Deepwater Horizon, BP Oil Spill, Safety Culture, Government Policy, Liability Caps, Financial Responsibility, Insurance

Suggested Citation

Cohen, Mark A. and Gottlieb, Madeline and Linn, Joshua and Richardson, Nathan D., Deepwater Drilling: Law, Policy, and Economics of Firm Organization and Safety (January 12, 2011). Resources for the Future Discussion Paper No. 10-65. Available at SSRN: https://ssrn.com/abstract=1744215 or http://dx.doi.org/10.2139/ssrn.1744215

Mark A. Cohen (Contact Author)

Vanderbilt University - Strategy and Business Economics ( email )

Nashville, TN 37203
United States
615-322-0533 (Phone)

HOME PAGE: http://https://business.vanderbilt.edu/bio/mark-cohen/

Vanderbilt University - Law School

131 21st Avenue South
Nashville, TN 37203-1181
United States

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States
202-328-5000 (Phone)

Madeline Gottlieb

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Joshua Linn

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Nathan D. Richardson

University of South Carolina - Law Library ( email )

1525 Senate Street
Columbia, SC 29208
United States

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

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