Why nations join the International Oil Pollution Compensation Funds: Risk, transaction costs and democracy

Abstract

Although the frequency of incidents has been decreasing over time, oil spills with major ecological and socioeconomic impacts still occur, leading to situations in which the cost of the damage was substantially higher than the limitation of liability imposed by the conventions of the so-called International Regime. This paper analyzes why nations would sign a convention that entitles the polluter to limit its liability. Among the reasons for the existence of the limitation of liability, the relevant literature remarks the social importance of the industry and understand limitation of liability as a way to protect or subsidize the oil and the shipping industry. However, we suggest that other factors would be involved in the decision to join or not the international conventions. We theorize and empirically test the role of risk, transaction costs and democracy in the willingness of nations to sign these conventions.

Keywords: Liability and compensation, social cost, oil pollution, environmental externalities

JEL Classification: Q5, D23, F55