Lobbying and Product Recalls: A Study of the U.S. Automobile Industry

Abstract

Noting the proliferation of product recalls and extensive use of lobbying in some critical product markets (e.g., automobiles, medical equipment), the authors examine the relationship between lobbying and product recalls. Lobbying does not alter product quality, so an efficiency perspective would suggest no relationship. However, a legitimacy-based institutional theory perspective and associated regulation models suggest that lobbying reduces voluntary firm-initiated and mandatory regulator-initiated recalls. To provide insights into these questions, the current study explores nine years of multisource data from the automotive industry, related to recalls and lobbying. The results, obtained with an instrumental variable approach, support dual impacts of lobbying for reducing both voluntary and mandatory recalls. Defect severity and media coverage moderate the effects, and the data support full indirect moderation, such that the interaction between media coverage and lobbying mediates the interaction between defect severity and lobbying. In terms of effect sizes, approximately $404,367 ($1.66 million) more in lobbying expenditures is associated with one fewer voluntary (mandatory) recall, assuming a typical average recall of 235,638 vehicles. This study highlights lobbying as an important (marketing) tool that automotive companies use to manage their regulatory environment, with deep implications for policy making, research, and practice.