The Liability Insurance Consumption Spiral: Evidence from Chinese Cities

Abstract Liability insurance is a vital source of financial protection and risk management for individuals and organizations. However, its widespread adoption carries certain unintended consequences, including the amplification of liability risks for uninsured and underinsured populations. This may result in a liability insurance consumption spiral, where purchases by some incentivize others to follow suit. The current study provides the first empirical tests of the consumption spiral hypothesis. Using data from 280 Chinese cities over an eight-year period (2011–2018), we find evidence that liability insurance purchases influence those in nearby geographic units and subsequent time periods. These knock-on effects are substantial and support the notion that purchase decisions are positively correlated. Additionally, our results reveal a key externality of liability insurance markets and the ways in which consumption diffuses across space and time.