Collusion through insurance: Sharing The Cost Of Oil Spill cleanups

Spills disrupt supply and increase prices. Even if a spill imposes a loss on the spiller, the disruption could increase the other firms' profits enough to more than compensate. A cynic might conjecture that, if the oil companies had a credible way to collude in the amount of care they took, they might reduce care and increase the frequency of spills so s to increase their joint profit. Since the oil industry maintains common resources to clean up oil spills, the cost of any member's spill is shared by all, of the members. Since spills are random, this cost sharing is a form of risk sharing. The observation that oil companies might collude to increase profit through risk sharing is rather cynical. Some people may find it hard to believe that oil companies orchestrate spills so as to increase profit. Indeed they may not but, nevertheless, cost sharing can decrease incentives for care and thereby increase profit.