Internalizing Externalities: Disclosure Regulation for Hydraulic Fracturing Fluids and Water Quality
Part of the TRR 266 Seminar Series
The rise of shale gas and tight oil development has triggered a major public debate about hydraulic fracturing (HF). In an effort to mitigate shale gas development risks, U.S. state legislators have implemented mandatory disclosures for HF fluids of newly fractured wells. In this paper, we study the effects of disclosure regulation for HF fluids on drilling activity and water quality. We find a substantial drop in water pollution after the disclosure mandates are introduced. We observe a decline in water pollution along the extensive margin (less HF activity) as well as the intensive margin (less per-HF well pollution). Additional analyses suggest that mostly of the decline in water pollution comes from the intensive margin. Moreover, we provide evidence pointing to litigation concerns, public shaming and the threat of regulatory interventions as the mechanisms through which disclosure operates. Taken together, our results provide evidence on how disclosure mandates can provide incentives to internalize negative externalities.