Beyond Liability: An Analysis of Financial Responsibility and Care Decisions in Hazardous Waste Management Facilities

To ensure the availability of cleanup funds, federal regulators often require ex ante proof of ability-to-pay for future environmental liabilities. These regulations currently apply to hazardous waste managers under the Resource Conservation and Recovery Act, and are being considered for expanded applicability to other industries. Regulators have long expressed concern regarding the reliability of self-insurance. Little economic work, however, has studied the differing incentive effects of different financial assurance mechanisms, such as self-insurance, insurance, or trust funds. Using a novel facility-level panel dataset, I test this hypothesis using data on firm financial assurance and chemical spills. I find that self-insurance mechanisms are strongly associated with increased spill rates. This paper shows that with noncompetitive insurance markets, third-party financial instruments may act as “private regulators" and incentivize facilities to exercise increased care against environmental damage. This association may also result from high-risk firms' selection into self-insurance.

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 Record created 2017-04-01, last modified 2018-01-22

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