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

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.

Environmental Pollution Liability Insurance and Corporate Performance: Evidence from China in the Perspective of Green Development

“…Their findings are that EPLI participation can improve the ecological outcomes of polluting corporations. However, some views believe in a premise that only if insurance corporations do not pay for corporate bankruptcy due to environmental pollution, EPLI will enhance environmental protection efforts, and the result of insurance is reduced production [34]. This suggests that, although insurance can urge corporations to appear environmentally friendly, the actual economic utility may not be as expected because they cannot achieve the desired output of corporations.…”

“…With the continuous improvement of corporate governance structure, CSR has gradually attracted the attention of academia. In the early literature, that representative of neoliberal economists, Friedman and others, believed that the only social responsibility that corporations need to undertake was the interests of shareholders [34]. However, more and more scholars believe that CSR also includes multiple responsibilities to consumers, communities and the environment [38,39].…”

“…Considering the significant volatility of China's stock market, this paper uses Tobin's Q-value A as an indicator to measure corporate performance. Referring to the studies of Wu et al [50] and Chen et al [34], this paper uses the decision of whether to purchase EPLI as an explanatory variable. If the insured corporations or its parent corporation is on the 2014 and 2015 "Environmental Pollution Liability Insurance Corporations List" and the contract is still in effect, it will be assigned a value of 1.…”

Environmental pollution liability insurance pilot policy and enterprise green transformation: evidence from Chinese listed corporates

“…However, these studies diverge in their perspectives when examining the micro-level dynamics. Chen et al (2022a) uncovered that EPLI pilots in China engendered a moral hazard predicament, thereby diminishing firms' motivation to curtail emissions and consequently exacerbating their environmental outcomes. In contrast, Zhu et al (2023) demonstrated that EPLI pilots contributed to enhancing firms' environmental performance.…”

“…Notably, scant attention has been devoted to investigating the interplay between green finance and green innovation (Huang et al, 2022;Irfan et al, 2022). Lastly, the existing body of research concerning the relationship between EPLI and microenterprise green transformation has yielded inconsistent results (Chen et al, 2022a;Zhu et al, 2023). These studies frequently rely on the EPLI-insured list issued by the former Ministry of Environmental Protection (MEP) in 2015-2016.…”