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New evidence of moral hazard: Environmental liability insurance and firms' environmental performance

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  • Shiyi Chen
  • Xiaoxiao Ding
  • Pingyi Lou
  • Hong Song

Abstract

This paper provides novel evidence of the moral hazard problem in environmental insurance by investigating the effect of environmental liability insurance (ELI) on firms' environmental performance. Using the staggered adoption of ELI policies in China as a quasi‐natural experiment, we employ a difference‐in‐differences setup based on a comprehensive firm‐level data set. We find that the adoption of ELI policies significantly reduces firms' efforts in treating water pollution. The negative estimate indicates a moral hazard problem and is the opposite of the positive estimates found mainly in studies that focus on US firms. We further find that the negative effect is lessened for firms in strictly supervised regions and for firms with strong environmental awareness. This paper is one of the first to evaluate environmental insurance in developing economies and provides novel evidence on moral hazard in environmental liability insurance markets.

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  • Shiyi Chen & Xiaoxiao Ding & Pingyi Lou & Hong Song, 2022. "New evidence of moral hazard: Environmental liability insurance and firms' environmental performance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(3), pages 581-613, September.
    • Handle: RePEc:bla:jrinsu:v:89:y:2022:i:3:p:581-613
    DOI: 10.1111/jori.12380
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    3. Carolina Henao & Jenny Paola Lis-Gutiérrez & Melissa Lis-Gutiérrez & Janitza Ariza-Salazar, 2024. "Determinants of efficient water use and conservation in the Colombian manufacturing industry using machine learning," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-11, December.

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