Cover-Up of Vehicle Defects: The Role of Regulator Investigation Announcements
| Autor: | Woonam Hwang, Victor DeMiguel, Soo-Haeng Cho |
|---|---|
| Přispěvatelé: | Carnegie Mellon University [Pittsburgh] (CMU), School of Business [London], London South Bank University (LSBU), Ecole des Hautes Etudes Commerciales (HEC Paris), HEC Research Paper Series |
| Jazyk: | angličtina |
| Rok vydání: | 2018 |
| Předmět: |
Cover (telecommunications)
Strategy and Management public policy Regulator Automotive industry Public policy Social Welfare Management Science and Operations Research General motors Consumer protection product recalls 0502 economics and business Government economic controls and regulations Confidentiality JRGD Product (category theory) 050207 economics Car industry BT Industrial organization 050208 finance business.industry 05 social sciences socially responsible operations automotive industry Product (business) Incentive Harm KHB [SHS.GESTION]Humanities and Social Sciences/Business administration 050211 marketing Business 050203 business & management |
| ISSN: | 0025-1909 |
| Popis: | Automakers, including Toyota and General Motors, were recently caught by the U.S. regulator for deliberately hiding product defects in an attempt to avoid massive recalls. Interestingly, regulators in the United States and United Kingdom employ different policies in informing consumers about potential defects: the U.S. regulator publicly announces all ongoing investigations of potential defects to provide consumers with early information, whereas the UK regulator does not. To understand how these different announcement policies may affect cover-up decisions of automakers, we model the strategic interaction between a manufacturer and a regulator. We find that, under both countries’ policies, the manufacturer has an incentive to cover up a potential defect when there is a high chance that the defect indeed exists and it may inflict only moderate harm. However, if there is only a moderate chance that the defect exists, only under the U.S. policy does the manufacturer have an incentive to cover up a potential defect with significant harm. We show that the U.S. policy generates higher social welfare only for very serious issues for which both the expected harm and recall cost are very high and the defect is likely to exist. We make four policy recommendations that could help mitigate manufacturers’ cover-ups, including a hybrid policy in which the regulator conducts a confidential investigation of a potential defect only when it may inflict significant harm. This paper was accepted by Vishal Gaur, operations management. |
| Databáze: | OpenAIRE |
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