Boomhower, Judson “Drilling Like There’s No Tomorrow: Bankruptcy, Insurance, and Environmental Risk” (Revised March 2016) (Revised version published in the American Economic Review, 109 (2): 391-426, February 2019 | WP-254R | Blog
This paper measures the effects of bankruptcy protection on industry structure and environmental outcomes in oil and gas extraction. Using administrative data from Texas, I exploit variation in an insurance requirement that reduced firms’ ability to avoid liability through bankruptcy. Among small firms, the policy substantially improved environmental outcomes and reduced production. Most production was re-allocated to larger firms with better environmental records, but high-cost production where social cost may have exceeded social benefit decreased. These results suggest that incomplete internalization of environmental costs due to bankruptcy is an important determinant of industry structure and safety effort in hazardous industries.