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Is there life after product quality failures? Evidence from employment decisions

Author

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  • Bao, Hengmiao
  • Yang, Shijie

Abstract

Prior literature has documented that product quality failures have negative impacts on the interest of stakeholders, such as consumers and shareholders. We extend this literature by investigating its potential effects on the interest of employees. Using a novel dataset that tracks the recall incidents of Chinese firms in an industry where product quality is crucial (i.e., the drug industry), our empirical results show that the effects on corporate employment decisions are twofold. On the one hand, we show that firms’ employment growth decreases after product recalls. The effect is more pronounced in non-state-owned firms, firms with higher labor costs, firms in regions with weaker labor protection, and during periods when local politicians lack promotion incentives. On the other hand, product recalls mainly induce firms to reduce the employment growth of low-grade employees, consistent with recalling firms relying on high-skilled labor to improve drug quality. Collectively, our study suggests that product quality failures could be a broader issue of corporate social responsibility (CSR) than being documented, and carries implications for policymakers concerning employment as well as product safety.

Suggested Citation

  • Bao, Hengmiao & Yang, Shijie, 2024. "Is there life after product quality failures? Evidence from employment decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 218(C), pages 325-355.
  • Handle: RePEc:eee:jeborg:v:218:y:2024:i:c:p:325-355
    DOI: 10.1016/j.jebo.2023.12.017
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    More about this item

    Keywords

    Product quality failure; Product recall; Drug safety; Employment growth; Corporate social responsibility;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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