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Information Transmission and Vehicle Recalls: The Role and Regulation of Recall Notification Letter

  • Hugo Benitez-Silva

    ()

    (Department of Economics, Stony Brook University)

  • Yong-Kyun Bae

    ()

    (Department of Global Studies, Pusan National University, Busandaehang-ro, 63beon-gil 2, Geumjeong-gu, Busan, Korea.)

Using data on correction rates for vehicle recalls in the United States from 2007 to 2010, we investigate information transmission from manufacturers to owners regarding the defects of recalled vehicles. We pay special attention to the role of the language manufacturers use to convey each recall’s seriousness in the letters they send to owners to explain the nature of the defects in their vehicles, and the possible consequences if the defects are not fixed. We find that recalls linked to riskier defects, defined by the type of equipment affected in the vehicles, are associated with higher correction rates. Interestingly, the content of recall notification letters plays an important role in increasing correction rates because the letters convey information to owners above and beyond baseline information about which part of their vehicles can present problems. We also find that, in a number of cases, the language that manufacturers use to explain the risks to owners are worryingly milder than the descriptions the National Highway Traffic Safety Administration (NHTSA) use, resulting in significantly lower correction rates. We conclude that information transmission to owners regarding recalls should be more clearly regulated since the language affects drivers’ likelihood of taking their cars to be fixed. We advocate that the NHTSA return to the pre-2001 practice of assigning hazard levels to all recalls, and that the agency consider making sure manufacturers clearly communicate recall rating information to vehicle owners. Our results indicate that these practices would result in higher correction rates, remove faulty cars from the roads, and, consequently, save lives.

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File URL: http://www.sunysb.edu/economics/research/papers/2013/Recall_Letters_Oct4_2013.pdf
File Function: First version, 2013
Download Restriction: no

Paper provided by Stony Brook University, Department of Economics in its series Department of Economics Working Papers with number 13-02.

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Date of creation: Oct 2013
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Handle: RePEc:nys:sunysb:13-02
Contact details of provider: Postal: Stony Brook, NY 11794-4384
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  1. Yong-Kyun Bae & Hugo Benítez-Silva, 2013. "The Effects Of Automobile Recalls On The Severity Of Accidents," Economic Inquiry, Western Economic Association International, vol. 51(2), pages 1232-1250, 04.
  2. Rupp, Nicholas G & Taylor, Curtis R, 2002. "Who Initiates Recalls and Who Cares? Evidence from the Automobile Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 123-49, June.
  3. Jarrell, Gregg & Peltzman, Sam, 1985. "The Impact of Product Recalls on the Wealth of Sellers," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 512-36, June.
  4. Crafton, Steven M & Hoffer, George E & Reilly, Robert J, 1981. "Testing the Impact of Recalls on the Demand for Automobiles," Economic Inquiry, Western Economic Association International, vol. 19(4), pages 694-703, October.
  5. 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 367-72, May.
  6. Marino, Anthony M, 1997. "A Model of Product Recalls with Asymmetric Information," Journal of Regulatory Economics, Springer, vol. 12(3), pages 245-65, November.
  7. Hugo Benitez-Silva & Yong-Kyun Bae, 2005. "Do Vehicle Recalls Reduce the Number of Accidents? The Case of the U.S. Car Market," Department of Economics Working Papers 05-06, Stony Brook University, Department of Economics.
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