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Can Environmental Insurance Succeed Where Other Strategies Fail? The case of underground storage tanks.

Haitao Yin, Alexander Pfaff, Howard Kunreuther
Risk Analysis 2011 volume 31 number 1: 12-24 (doi 10.1111/j.1539-6924.2010.01479.x)

PDF link iconPrivate risk reduction will be socially efficient only when firms are liable for all the damage that they cause. We find that environmental insurance can achieve social efficiency even when two traditional policy instruments—ex post fines and risk management mandates with ex ante fines—do not. Inefficiency occurs with ex post fines, when small firms declare bankruptcy and escape their liabilities, limiting the incentives from this policy tool. Firms ignore mandates to implement efficient risk management because regulatory agencies do not have sufficient resources to monitor every firm. The evolution of the U.S. Environmental Protection Agency’s and states’ underground storage tank programs suggests that mandating environmental insurance can address inefficiency due to small firms declaring bankruptcy. Comparing insurance mandates to risk management mandates, the burden on a regulator is lower if all it has to do is to confirm that the firm has insurance rather than that the firm has actually, and effectively, implemented required management practices. For underground storage tanks, we show that insurance lowered toxic releases.


To Err on Humans is not Benign: incentives for adoption of medical error-reporting systems

Joshua Graff Zivin, Alexander Pfaff
Journal of Health Economics 23 (2004) 935–949

PDF link iconConcerns about frequent and harmful medical errors have led policy makers to advocate the creation of a system for medical error reporting. Health providers, fearing that reported information about errors would be used against them under the current medical malpractice system, have been reluctant to participate in such reporting systems.We propose a re-design of the malpractice system – one in which penalties are a function of the health provider’s reporting efforts – to overcome this incentive problem.We also consider some alternatives to this mechanism that address two important ways in which reporting effort may not be observable: hospitals may have interests distinct from individual physicians and may not be able to observe their reporting efforts, and a regulatory agency or a court may not be able to adequately observe reporting efforts by a provider.

Big Field, Small Potatoes: an empirical assessment of EPA’s Self-Audit Policy

Alexander Pfaff, Chris William Sanchirico
Journal of Policy Analysis and Management (2004) volume 23 number 3: 415–432

PDF link iconEnvironmental self-auditing is said to deserve and require encouragement. Although firms can audit themselves more cheaply and effectively than regulators, they are deterred for fear that information they uncover will be used against them. To reduce this disincentive, the Environmental Protection Agency’s (EPA’s) Audit Policy lowers punitive fines when firms promptly disclose and correct self-discovered violations. While some contend that the Audit Policy is inadequate, EPA touts its success based on the policy’s track record. Our examination of that track record leads us to question EPA’s claim. Comparing the violations in these cases with those detected by standard EPA enforcement suggests that the typical self-audited violation is relatively minor. Cases arising under the Policy are more likely to concern reporting violations and less likely to concern emissions. The relative insignificance of self-audited violations raises a number of policy questions, including whether the Audit Policy should be revised to play a larger role in enforcement.


Environmental Self-Auditing: setting the proper incentives for discovery and correction of environmental harm

Alexander Pfaff, Chris William Sanchirico
Journal of Law, Economics & Organization (2000) volume 16 number 1: 189-208.

PDF link iconMany firms conduct “environmental audits” to test compliance with a complex array of environmental regulations. Commentators suggest, however, that self-auditing is not as common as it should be, because firms fear that what they find will be used against them. This article analyzes self-auditing as a two-tiered incentive problem involving incentives both to test for and to effect compliance. After demonstrating the inadequacy of conventional remedies, we show that incentives can be properly aligned by conditioning fines on firms’ investigative effort. In practice, however, the regulator may not be able to observe such effort. Accordingly, we propose and evaluate the use of three observable proxies for self-investigation: the manner in which the regulator detected the violation; the firm’s own disclosure of violations; and the firm’s observed corrective actions. Each method has its own efficiency benefits and informational requirements, and each is distinct from EPA’s current audit policy.