Controlling Stochastic Pollution Events through Liability Rules: Some Evidence from OCS Leasing

Abstract

Under the OCS Lands Act, firms are strictly liable for damages from oil spills. To the extent that this liability rule causes firms to internalize environmental risks, incentives for damage avoidance behavior are provided. Using data from the 1979 Georges Bank lease sale, we use a robust estimation technique to test the hypothesis that potential environmental costs are reflected in bids for OCS leases. The results indicate a substantial response to environmental risks. Recognizing reduced rents, we estimate that total high bids have declined by 20% because of firms' perceptions of environmental risks. The results suggest that liability rules have considerable potential in controlling stochastic pollution events.