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Pollution liability insurance and corporate environmental compliance in China

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  • Cassidy, Alecia Waite
  • Wu, Fangjian
  • Zhang, Yiyuan

Abstract

This study examines the effect of a pollution liability insurance mandate on corporate environmental compliance in Shenzhen, China. We employ a triple differences design, comparing electroplating and circuit board manufacturing firms, mandated to purchase insurance, to industries and a neighboring city without the mandate. Results show a 0.48 reduction in annual environmental violations per firm (a 72% decrease). Only about half of firms comply. Within the Shenzhen electroplating and circuit board industry, we find that insured firms violate more than uninsured firms (an increase of about 0.09 annual violations). We find suggestive evidence that this increase is driven by moral hazard rather than adverse selection. Taken as a whole, our findings demonstrate that premium-based incentives effectively counteract market failures due to asymmetric information, increasing environmental compliance on net.

Suggested Citation

  • Cassidy, Alecia Waite & Wu, Fangjian & Zhang, Yiyuan, 2024. "Pollution liability insurance and corporate environmental compliance in China," Ruhr Economic Papers 1100, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:306831
    DOI: 10.4419/96973278
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    More about this item

    Keywords

    Environmental compliance; liability insurance; moral hazard; adverse selection;
    All these keywords.

    JEL classification:

    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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