【公开学术报告】Before Too Late: Product Recall Delays, Long Product Cycles, and Policy Design

Date & Time: 9:30-11:00 am, Mon. 2^nd, December 2019

Venue: Room 2101, Tongji Building A

Language: English

Speaker：Dr. Wenzheng MAO 毛文峥（The University of Hong Kong）

ABSTRACT

When a safety defect occurs, manufacturers often use product recalls to mitigate potential consequences. Although consumers expect on-time recalls for product defects, our observations with respect to large recalls in the automobile industry suggest that firms may severely delay their recall decisions. In this paper, we incorporate a Bass-diffusion product cycle model into a firm’s recall timing decision. Our theoretical model reveals three main results. First, a product recall has a negative impact on product sales, especially when the recall is initiated at an early stage of product cycle. Second, a firm might use a delayed recall, either by delaying a recall to long after an investigation ends or/and by manipulating investigation time needed, to mitigate this negative impact. We show that a firm with a high margin-to-recall-cost ratio is more likely to have a (long) delayed recall than a firm with a low one. Both results are further supported by our empirical analysis utilizing the U.S. auto-mobile industry data and NHTSA recall data in 2012-2015. Finally, we show that different penalty schemes, such as duration-dependent or lump-sum penalties, have differential effects in deterring delay duration and investigation manipulation. Our model not only helps us understand how firms make their recall timing decisions, but also offers governments and regulation bodies new instruments (including investigation efforts, penalty design, information disclosure, and firm supervision) to help reduce delayed recalls, thereby reducing potential casualties associated with these recall delays.