More Than a Wing and a Prayer: Government Indemnification of the Commercial Space Launch Industry

Using rockets to launch communications satellites and other spacecraft poses risks to the uninvolved public, including persons and property under the flight path of the launch vehicle. The federalgovernment plays a pivotal technical role during the actual launch by carrying out certain risk-related procedures, thus causing third-party risk to be jointly produced by the company and the government. In addition, under the Commercial Space Launch Act, the government partially indemnifies commercial launch companies for third-party damages. We compare the indemnification policy to optimal liabilityrules under public-private co-production of risk. Under modest assumptions, shared liability created by the indemnification rules decreases the incentive of both parties to take care relative to the optimum. If care were observable, it would be preferable for the government to fully indemnify companies that take due care. The role of the government as an agent for third parties may qualify these findings.

Private companies launch satellites into space to facilitate television and phone communications, global navigation, environmental monitoring, and a variety of other land-based services. But when mishaps occur, and launch vehicles fall to the ground, the result can be damage to property as well as injury and death. The question of who indemnifies the risk of third-party harm is one that is of growing concern to those in the commercial space business. 

In their paper, “More Than a Wing and a Prayer: Government Indemnification of the Commercial Space Launch Industry,” RFF researchers Tim Brennan, Carolyn Kousky, and Molly Macauley look at alternative risk-sharing formulas.

Excerpts from the paper: 
“Although the coproduction of the risk suggests that government should bear some of the costs, partial indemnification of the launch company could still lead to moral hazard. The launch company may take too little care before the launch in the production of the launch vehicle, since the government will be bearing some of the costs of an accident. On the other hand, failure to indemnify the company could lead to moral hazard in the reverse direction, where the government takes too little care during the launch or in setting safety regulations. Splitting the costs, as is currently done, also poses problems, in that the government may take too little care to avoid losses below the level at which it becomes liable. The government may also be too quick to abort launches, since it is not responsible for the private costs to the company of loss of a satellite from an abort.” 

“Politics, and not economics, may also be the likely underpinning for the indemnification rules. Indemnification may simply be a political pacifier for constituents under the flight path worried about the ability of launch companies to compensate them for possible damages. Considerations such as this suggest that care levels are likely influenced by more than potential liability for damages. The government may take care in anticipation of political outcry from an accident. Determining how liability rules interact with these other incentives is difficult, but this information could significantly influence whether and what type of shared liability rule should be adopted.”