Munich Personal RePEc Archive

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

Bae, Yong-Kyun and Benitez-Silva, Hugo (2013): Information Transmission and Vehicle Recalls: The Role and Regulation of Recall Notification Letters.

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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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