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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.


Regional Interdependence and Forest “Transitions”: substitute deforestation limits the relevance of local reversals

Alexander Pfaff, Robert Walker
Land Use Policy 2010 27:119–129

PDF link iconUsing case studies and concepts we suggest that constraints upon aggregate or global forest transition are significantly more severe than those upon local forest reversals. The basic reason is that one region’s reversal can be facilitated by other regions that supply resources and goods, reducing the demands upon the region where forests rise. Many past forest reversals involve such interdependence. For ‘facilitating regions’ also to rise in forest requires other changes, since they will not be receiving such help. We start by discussing forest-transitions analysis within the context of Environmental Kuznets Curves (EKCs), for a useful typology of possible shifts underlying transitions. We then consider the historical Northeast US where a regional reversal was dramatic and impressive. Yet this depended upon agricultural price shocks, due to the Midwest US supplying food, and also upon the availability of timber from other US regions. Next we consider deforestation in Amazônia, whose history (like the Northeast US) suggests a potential local role for urbanization, i.e. spatial concentration of population. Yet inter-regional issues again are crucial. For cattle and soy, expansion of global demands may give to Amazonia a role more like the Midwest than the Northeast US. In addition, across-region interdependencies will help determine where reversal and facilitation occur. Finally we discuss the constraints upon very broad forest transition.

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.


Generating Probabilities in Support of Societal Decision Making: the case of abrupt climate change

Alexander Pfaff, Dorothy M. Peteet
EOS (American Geophysical Union), May 15 2001

PDF link iconEarth-science predictions of natural phenomena are increasingly seen as valuable aids to improved societal decision making. Pielke et al. recently (EOS 7/13/99) argued persuasively that good predictions alone won’t achieve better societal decisions. These authors’ call to change the decision environments in which scientific predictions are used, though, may be more relevant to the daily activities of policy makers than to those of scientists. We see a role also for changing the information that scientists feed into those decision environments. In particular, scientists could better serve societal needs by generating not only possible scenarios, but also improved probabilities that decision makers need, including for decisions to be taken in the near future.


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.

From Deforestation to Reforestation in New England, USA

Alexander Pfaff
The Forest in the South and North in the Context of Global Warming (book by WIDER).

PDF link iconHistorical data from the late 19th to the early 20th century are examined for New England. From the attempt to explain the reforestation that occurred, three main land-use claims arise: 1) population clearly does not fully dictate land use (e.g., de- or re-forestation); while population may well have an independent effect on land use, that effect clearly does not dominate all others; 2) factors that affect relative land-use returns, whether “external” to a region or not, clearly do affect land use; two examples are transport costs and productivity of other regions, which affect trade; and finally, 3) long-run analysis must consider shifts even in overall framework, such as from agriculture to migration and industrialization processes involving different economic dynamics. Support for these claims comes from limited historical data alongside relevant theory concerning optimal allocation of land between the four most relevant land uses: agriculture, manufacturing, forest (for timber or as a result of abandonment), and shelter (or, more generally, land uses other than for production). Supporting the “population” claim, previous New England farm expansion flattened out post-1850 and eventual reversed itself, even as population was increasing. Regarding the “returns” claim, the breakpoint in the 1790-1930 series of within-region measures (based on county-level data) of concentration of population is very clearly at about 1830, precisely the era in which the transportation revolution involving railroads, steamships and canals started to have its effect. Concerning the “long-run” claim, given an interest in land use there are grounds for attention to shifts in regional output, such as towards manufacturing from agriculture, as there is evidence that such shifts involved significant changes, in particular concentration of population within particular counties, along rivers and in particular locations along rivers.