Pollution Liability Insurance and Corporate Environmental Compliance in China
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.