Beyond Belts and Suspenders: Promoting Private Risk Management in Offshore Drilling

This paper critically examines existing policies for regulating offshore drilling. It argues that historical regulations based on requiring significant redundancy in safety systems—“belts and suspenders”—is ineffective because the risks of safety system failures are not independent. New regulations require detailed safety and environmental planning and can be broadly classified as management-based regulations (MBR). The paper evaluates the theory of management-based regulations as it applies to offshore drilling and presents the existing evidence on MBR effectiveness. The results indicate that MBR is theoretically well suited to regulate offshore drilling, but there is limited empirical evidence of the effectiveness of MBR in regulating low-probability, high-consequence events. The paper ends with a proposal for an alternative regulation called a deposit-discount-refund system that is designed to better promote private risk management by creating incentives for both the creation and implementation of risk management plans.

Author(s): Lori S. Bennear

Published: December 2011

download: working paper (.pdf) >