The Effect of Automobile Insurance and Accident Liability Laws on Traffic Fatalities*

This paper investigates the incentive effects of automobile insurance, compulsory insurance laws, and no-fault liability laws on driver behavior and traffic fatalities. We analyze a panel of 50 U.S. states and the District of Columbia for 1970–98, a period in which many states adopted compulsory insurance regulations and/or nofault laws. Using an instrumental variables approach, we find evidence that automobile insurance has moral hazard costs, leading to an increase in traffic fatalities. We also find that reductions in accident liability produced by no-fault liability laws have led to an increase in traffic fatalities (estimated to be on the order of 6 percent). Overall, our results indicate that, whatever other benefits they might produce, increases in the incidence of automobile insurance and moves to no-fault liability systems have significant negative effects on traffic fatalities. In the United States today, we are at the threshold of a great experiment in social insurance—one of the most far-reaching in consequence of any that has been yet attempted in the New World. Probably within the next decade or two, most of the states will pass laws, the purposes of which will be the financial assistance of some or all of the victims of automobile accidents, and the prevention of such accidents in so far as is possible. [Edison L. Bowers, Selected Articles on Compulsory Automobile Insurance (1929)]