Lobbying and Product Recalls: A Study of the US Automobile Industry

Abstract

Reports of the influence of corporate lobbying suggest that firms (e.g., automotive companies) try to persuade regulators (the U.S. National Highway Traffic Safety Administration – NHTSA) not to order recalls of products (vehicles) with potentially harmful or fatal defects (e.g., rapid acceleration). Lobbying as a political mechanism is widely studied in social science research, but remains unexplored in the marketing literature on product-harm crisis. In a utopian setting, only product quality should influence product recalls, and lobbying should not matter. To examine whether corporate lobbying influences recalls, the authors combine automotive recall data with firms’ corporate lobbying expenditures. The results reveal that increase in lobbying expenses reduces number of voluntary recalls (which the automobile firm initiates) and mandatory recalls (which NHTSA recommends). Firms with higher lobbying expenditure are less likely to initiate a recall, such that approximately $417,014 more in lobbying expenditures is associated with one less voluntary recall by the firm. This amount is important, as a typical conservative estimates of recall costs a firm are around $12 million. Results suggest that a firm’s political influence also led the regulatory agency to adopt a bias that favors the lobbying firm; approximately $1.55 million more in lobbying expenditures are associated with one less mandatory recall. The authors exploit changes in individual political contributions as an instrumental variable to address potential endogeneity concerns for lobbying expenditures. The consistent results affirm that lobbying is an important (marketing) tool used by automotive companies to influence automotive recalls.