A Theoretical and Empirical Study of No-Fault Insurance and its Effects on Driving Behavior

This paper is testing the hypothesis: no-fault insurance leads to an increase in car accidents because drivers engage in riskier driving behavior, since their economic costs are lower in no-fault states. This is done through a theoretical and empirical analysis of the effects of no-fault insurance on fatal accident rates. The theory says that no-fault insurance leads to an increase in accidents because drivers’ costs of driving are lower. In order to empirically test this an empirical analysis is conducted on the fatality rates for all U.S. states between the years 1994 to 2010. Since panel data is used a regular fixed effects model is utilized as an estimation method. The empirical results show that no- fault states are associated with a 12 percent higher fatal accident rate compared to tort states