Accidents Waiting to Happen: Liability Policy and Toxic Pollution Releases

Proponents of environmental policies based on liability assert that strict liability imposed on the polluter will induce firms to handle hazardous wastes properly and to avoid disposing them into the environment. Economic theory and a few well-publicized cases, however, suggest that a number of factors may dilute the incentives posed by strict liability. In this paper, we run regressions relating unintended releases of pollution into the environment (aggregated at the state level, and followed over nine years from 1987 to 1995) to the imposition of strict liability on the polluter, exploiting variation across states in the liability provisions of their mini-Superfund laws, and in the years these were adopted. We experiment with instrumental variable estimation, fixed effects, and endogenous switching, and find that only after we explicitly model the endogeneity of states' liability laws is strict liability seen as reducing the seriousness of spills and releases. We also find evidence consistent with the notion that under strict liability, firms may spin off into, or delegate riskier production processes to, smaller firms, which are partially sheltered from liability. This tendency appears to be widespread.