Vehicle Owners’ Corrective Behaviour in American Automobile Recalls

Abstract

ABSTRACT In this paper, we study vehicle owner behavior in response to automobile recalls in the US by examining data on recall correction rates. We address three research questions. First, do owner notification letters effectively lead to vehicle owners’ corrective behavior? Second, do vehicle owners take cost-saving actions using relevant information in recall letters? Third, can we identify vehicle owners’ behavioral differences in responding to recall issuance? We find evidence that vehicle owners respond to riskier defects more actively. In particular, if recall letters contain alerting words such as ‘death’, then the correction rates of those recalls are higher. Furthermore, the correction rate for recall letters with the expression ‘free of charge’ is higher. Heterogeneous vehicle owners behave differently: some owners immediately return their vehicles for repairs regardless of the risks their vehicles have, while others procrastinate their corrective actions and respond to recalls only when they believe that the defects are risky. We conclude that owner notification letters play an important role in raising correction rates.