Working Paper: NBER ID: w15100
Authors: Haitao Yin; Howard Kunreuther; Matthew White
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.
Keywords: risk-based pricing; environmental accidents; private insurance; government assurance programs
JEL Codes: D8; H23; K32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| switch from state assurance programs to private insurance (I13) | reduction in accidental underground fuel tank leaks (Q52) |
| private insurers mitigate moral hazard (G52) | financial incentives for tank owners to prevent leaks (L99) |
| switch from state assurance programs to private insurance (I13) | avoided cleanup costs and environmental harm (Q52) |