Managing Product Quality in the Field: A Structural Study of U.S. Auto Recalls

U.S. auto recalls are increasing exponentially. This increase is in part due to technological advances on quality information flow from consumers to auto firms. We study how automakers use consumer complaints while managing product quality in the field? Automakers improve field performance by initiating recalls. But this problem is more complex. The U.S. government also tracks consumer complaints data. Particularly, the regulator NHTSA has a strong presence in auto recalls: NHTSA recalled 40% of the faulty products over the period 1994--2015. If manufacturers' recall policies are elastic to the government's recall policies, the regulator's presence could cause two antithetical effects: (i) a deterrence effect, and (ii) a free riding effect. We contrast which of these two effects is more dominant. We model a manufacturer's and regulator's joint recall decisions as an asymmetric dynamic discrete choice game. We estimate our model with a data set comprising 14,124 recalls and 976,062 complaints. The agents use these complaints to learn quality, trading off between a fixed recall cost and a variable liability cost. We find both agents perceive a recall to be less costly when initiated by the other, and hence initiating auto recalls is a game of chicken.