IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_8636.html
   My bibliography  Save this paper

The Effect of Information on Market Activity; Evidence from Vehicle Recalls

Author

Listed:
  • Inge van den Bijgaart
  • Davide Cerruti

Abstract

We evaluate the effect of vehicle recalls on vehicle transactions in the second-hand market. Using a rich dataset of Dutch vehicle registrations, we exploit the quasi-experimental variation in recalls across nearly-identical cars. We find strong heterogeneities across market segment: vehicles with a lower (higher) list price or some (zero) defects experience an increase (decrease) in transactions after a recall. Based on our theoretical model, this suggests that recalls increase sorting in low-end markets, yet exacerbate adverse selection in high-end markets. Our results shed light on the effect of information arrival in markets subject to uncertainty and information asymmetries.

Suggested Citation

  • Inge van den Bijgaart & Davide Cerruti, 2020. "The Effect of Information on Market Activity; Evidence from Vehicle Recalls," CESifo Working Paper Series 8636, CESifo.
    • Handle: RePEc:ces:ceswps:_8636
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp8636.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Yoseph, Nir Shlomo, 2018. "The Impact of Environmental Fraud on the Used Car Market: Evidence from Dieselgate," CEPR Discussion Papers 12899, C.E.P.R. Discussion Papers.
    2. Ruediger Bachmann & Gabriel Ehrlich & Ying Fan & Dimitrije Ruzic, 2017. "Firms and Collective Reputation: A Study of the Volkswagen Emissions Scandal," CESifo Working Paper Series 6805, CESifo.
    3. Strittmatter, Anthony & Lechner, Michael, 2020. "Sorting in the used-car market after the Volkswagen emission scandal," Journal of Environmental Economics and Management, Elsevier, vol. 101(C).
    4. Piet Eichholtz & Nils Kok & John M. Quigley, 2013. "The Economics of Green Building," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 50-63, March.
    5. McCarthy, Patrick S, 1996. "Market Price and Income Elasticities of New Vehicles Demand," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 543-547, August.
    6. Omesh Kini & Jaideep Shenoy & Venkat Subramaniam, 2017. "Impact of Financial Leverage on the Incidence and Severity of Product Failures: Evidence from Product Recalls," The Review of Financial Studies, Society for Financial Studies, vol. 30(5), pages 1790-1829.
    7. Jonathan R. Peterson & Henry S. Schneider, 2014. "Adverse selection in the used-car market: evidence from purchase and repair patterns in the Consumer Expenditure Survey," RAND Journal of Economics, RAND Corporation, vol. 45(1), pages 140-154, March.
    8. Gregory Lewis, 2011. "Asymmetric Information, Adverse Selection and Online Disclosure: The Case of eBay Motors," American Economic Review, American Economic Association, vol. 101(4), pages 1535-1546, June.
    9. Rosa Ferrer & Helena Perrone, 2017. "Consumers’ Costly Responses to Product-Harm Crises," Working Papers 975, Barcelona School of Economics.
    10. Lint Barrage & Eric Chyn & Justine Hastings, 2020. "Advertising and Environmental Stewardship: Evidence from the BP Oil Spill," American Economic Journal: Economic Policy, American Economic Association, vol. 12(1), pages 33-61, February.
    11. Alessandro Lizzeri & Igal Hendel, 1999. "Adverse Selection in Durable Goods Markets," American Economic Review, American Economic Association, vol. 89(5), pages 1097-1115, December.
    12. Seth Freedman & Melissa Kearney & Mara Lederman, 2012. "Product Recalls, Imperfect Information, and Spillover Effects: Lessons from the Consumer Response to the 2007 Toy Recalls," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 499-516, May.
    13. Graham Beattie & Ruben Durante & Brian Knight & Ananya Sen, 2021. "Advertising Spending and Media Bias: Evidence from News Coverage of Car Safety Recalls," Management Science, INFORMS, vol. 67(2), pages 698-719, February.
    14. Daniel W. Elfenbein & Raymond Fisman & Brian McManus, 2015. "Market Structure, Reputation, and the Value of Quality Certification," American Economic Journal: Microeconomics, American Economic Association, vol. 7(4), pages 83-108, November.
    15. Yan Liu & Venkatesh Shankar, 2015. "The Dynamic Impact of Product-Harm Crises on Brand Preference and Advertising Effectiveness: An Empirical Analysis of the Automobile Industry," Management Science, INFORMS, vol. 61(10), pages 2514-2535, October.
    16. Steven Tadelis & Florian Zettelmeyer, 2015. "Information Disclosure as a Matching Mechanism: Theory and Evidence from a Field Experiment," American Economic Review, American Economic Association, vol. 105(2), pages 886-905, February.
    17. Hartman, Raymond S, 1987. "Product Quality and Market Efficiency: The Effect of Product Recalls on Resale Prices and Firm Valuation," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 367-372, May.
    18. Robert G. Hammond, 2013. "Sudden Unintended Used‐Price Deceleration? The 2009–2010 Toyota Recalls," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(1), pages 78-100, March.
    19. Enrique Seira & Alan Elizondo & Eduardo Laguna-Müggenburg, 2017. "Are Information Disclosures Effective? Evidence from the Credit Card Market," American Economic Journal: Economic Policy, American Economic Association, vol. 9(1), pages 277-307, February.
    20. Jonathan R. Peterson & Henry S. Schneider, 2017. "Beautiful Lemons: Adverse Selection in Durable-Goods Markets with Sorting," Management Science, INFORMS, vol. 63(9), pages 3111-3127, September.
    21. Sébastien Houde, 2018. "How consumers respond to product certification and the value of energy information," RAND Journal of Economics, RAND Corporation, vol. 49(2), pages 453-477, June.
    22. Ginger Zhe Jin & Phillip Leslie, 2003. "The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(2), pages 409-451.
    23. Rüdiger Bachmann & Gabriel Ehrlich & Ying Fan & Dimitrije Ruzic & Benjamin Leard, 2023. "Firms and Collective Reputation: a Study of the Volkswagen Emissions Scandal," Journal of the European Economic Association, European Economic Association, vol. 21(2), pages 484-525.
    24. Mooweon Rhee & Pamela R. Haunschild, 2006. "The Liability of Good Reputation: A Study of Product Recalls in the U.S. Automobile Industry," Organization Science, INFORMS, vol. 17(1), pages 101-117, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yoseph, Nir Shlomo, 2018. "The Impact of Environmental Fraud on the Used Car Market: Evidence from Dieselgate," CEPR Discussion Papers 12899, C.E.P.R. Discussion Papers.
    2. Che, X. & Katayama, H. & Lee, P., 2020. "Willingness to Pay for Brand Reputation: Lessons from the Volkswagen Diesel Emissions Scandal," Working Papers 20/02, Department of Economics, City University London.
    3. Strittmatter, Anthony & Lechner, Michael, 2020. "Sorting in the used-car market after the Volkswagen emission scandal," Journal of Environmental Economics and Management, Elsevier, vol. 101(C).
    4. Rosa Ferrer Zarzuela & Helena Perrone, 2017. "Consumers’ costly responses to product-harm crises," Economics Working Papers 1571, Department of Economics and Business, Universitat Pompeu Fabra.
    5. Rosa Ferrer & Helena Perrone, 2023. "Consumers’ Costly Responses to Product-Harm Crises," Management Science, INFORMS, vol. 69(5), pages 2639-2671, May.
    6. Aggarwal, Mayank & Chakrabarti, Anindya S. & Chatterjee, Chirantan & Higgins, Matthew J., 2023. "Research and market structure: Evidence from an antibiotic-resistant pathogenic outbreak," Research Policy, Elsevier, vol. 52(1).
    7. Itai Ater & Nir S. Yoseph, 2022. "The Impact of Environmental Fraud on the Used Car Market: Evidence from Dieselgate," Journal of Industrial Economics, Wiley Blackwell, vol. 70(2), pages 463-491, June.
    8. Kathleen Cleeren & Marnik G. Dekimpe & Harald J. Heerde, 2017. "Marketing research on product-harm crises: a review, managerial implications, and an agenda for future research," Journal of the Academy of Marketing Science, Springer, vol. 45(5), pages 593-615, September.
    9. Hasan, Iftekhar & Noth, Felix & Tonzer, Lena, 2023. "Cultural norms and corporate fraud: Evidence from the Volkswagen scandal," Journal of Corporate Finance, Elsevier, vol. 82(C).
    10. Horton, John J. & Johari, Ramesh & Kircher, Philipp, 2021. "Cheap Talk Messages for Market Design: Theory and Evidence from a Labor Market with Directed," LIDAM Discussion Papers CORE 2021033, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    11. In Kyung Kim & Kyoo il Kim, 2022. "No Beer No Friends: Quantifying the Effect of the Beer Boycott," Journal of Industrial Economics, Wiley Blackwell, vol. 70(3), pages 711-751, September.
    12. Benedikt Notheisen & Jacob Benjamin Cholewa & Arun Prasad Shanmugam, 2017. "Trading Real-World Assets on Blockchain," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 59(6), pages 425-440, December.
    13. Fesselmeyer, Eric, 2018. "The value of green certification in the Singapore housing market," Economics Letters, Elsevier, vol. 163(C), pages 36-39.
    14. Barbos, Andrei & Hartman, John, 2023. "Reputational effects on third-party agents: A study of the market for fine and rare wines," Journal of Economic Behavior & Organization, Elsevier, vol. 208(C), pages 359-372.
    15. Li, Huashan & Bapuji, Hari & Talluri, Srinivas & Singh, Prakash J., 2022. "A Cross-disciplinary review of product recall research: A stakeholder-stage framework," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 163(C).
    16. Ert, Eyal & Fleischer, Aliza, 2019. "The evolution of trust in Airbnb: A case of home rental," Annals of Tourism Research, Elsevier, vol. 75(C), pages 279-287.
    17. Daniela Rroshi & Michael Weichselbaumer, 2021. "What is in a price? Evidence on quality signaling for experience goods," Department of Economics Working Papers wuwp311, Vienna University of Economics and Business, Department of Economics.
    18. Jie Bai & Ludovica Gazze & Yukun Wang, 2019. "Collective Reputation in Trade: Evidence from the Chinese Dairy Industry," CID Working Papers 366, Center for International Development at Harvard University.
    19. Vivek Astvansh & Yen‐Yao Wang & Wei Shi, 2022. "The effects of the news media on a firm's voluntary product recalls," Production and Operations Management, Production and Operations Management Society, vol. 31(11), pages 4223-4244, November.
    20. Siqi Liu & Bhoomija Ranjan & Benjamin Reed Shiller, 2020. "Are Coarse Ratings Fine? Applications to Crashworthiness Ratings," Working Papers 132, Brandeis University, Department of Economics and International Business School.

    More about this item

    Keywords

    vehicles; recalls; adverse selection; sorting; information;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_8636. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.