Sudden Unintended Used-Price Deceleration?

The 2009–2010 Toyota Recalls

ROBERT G. HAMMOND
Department of Economics, North Carolina State University
Campus Box 8110, Raleigh, NC 27695-8110
robert_hammond@ncsu.edu

Using data from the vehicle resale market, I test consumer responsiveness to large-scale product
recalls that are caused by safety problems. The used-vehicle prices of Toyotas are compared
to the used-vehicle prices of the other major domestic and foreign manufacturers. The results
quantify the losses suffered by Toyota vehicle owners in secondary markets due to the 2009–2010
safety recalls of more than 9 million Toyota Motors vehicles. The treatment effect of a recall is
measured using panel data with a difference-in-differences estimation approach that allows for
time-varying treatment effects and serial correlation. I find that this recall episode had negative
effects in the resale market for automobiles that were quantitatively small (less than 2% of the
vehicle’s resale value), statistically indistinguishable from zero, and short lived (did not persist
beyond December 2009). A comparison with Audi’s recalls in the 1980s of vehicles with sudden
unintended acceleration suggests that the extent to which a company’s reputation is established
is more important than whether or not a company has a reputation for producing high-quality
products.

1. Introduction
Product recalls related to safety problems receive enormous amounts of attention in
the popular press. In this paper, I study the automobile industry, where 22.4 million
automobile owners received recall notices during a 12-month period ending in the
summer of 2010. As a result, more new and used vehicles were recalled in 2010
than new vehicles were sold in 2010 (Bunkley and Vlasic, 2010). The most widely
covered recall during this period was the recall of Toyota Motors vehicles due to
safety issues broadly dubbed “sudden unintended acceleration.” These safety problems
initially involved floor mats that could entrap the vehicle’s accelerator pedal but were
expanded to include mechanical issues with the accelerator pedal itself. Both the
Lexus and Toyota brands of Toyota Motors were included in the recall of more than
9 million vehicles worldwide.
Toyota’s outlook following its recalls was increasingly bleak, from the negative
media coverage to the negative stock market reaction (−15% from January 25 to January
29, 2010). Reports placed the costs of the recalls at $2 billion, a figure that excludes
the damage to Toyota’s reputation as a quality leader. In contrast to the initial burst of

I thank a coeditor and two referees for suggestions; Gary Fournier, Charles Knoeber, and Stephen Margolis
for discussions; the editorial staff at the Black Book (especially managing editor Ricky Beggs) for insights
into the secondary market for automobiles; seminar participants at East Carolina University and the Southern
Economic Association 2010 Annual Meetings for comments; the Edwin Gill Research Grant for financial
support; and Jong Jin Kim for excellent research assistance.

C 2013 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume 22, Number 1, Spring 2013, 78–100
Sudden Unintended Used-Price Deceleration? 79

negative news, later reports documented increasing new-vehicle sales for the company
and profits of $2.2 billion for the second quarter of 2010 (Hennigan, 2010). I reconcile
the expected and actual performance of Toyota Motors during the recall period by
quantifying the reaction of the company’s consumers to its safety problems. More
fundamentally, I analyze used-vehicle price data to address the extent to which consumer
demand responds to safety recalls.
It is most informative to address this question using data from secondary markets
because these resale prices most accurately quantify the effect of recalls in the auto-
mobile industry. Data from primary markets (i.e., Toyota dealers selling new Toyotas)
intermingle shocks to consumer demand with strategic adaptation by the manufacturer.
In the particular case of interest here, Toyota responded to the negative attention of its
recalls by offering “an average of $2,256 in incentives, according to the research firm
Edmunds.com, more than Toyota had ever had to give customers to buy its cars and
trucks” (Ahrens, 2010). Further complicating data from primary markets are the potential
for strategic adaptation by the competitors of the affected manufacturer. Here, General
Motors (GM) offered $1,000 incentives to consumers who traded in a Toyota vehicle
to purchase a GM vehicle; Chrysler, Ford, and Hyundai soon began offering similar
incentives to poach Toyota consumers. Although data from the secondary market for
automobiles provide the cleanest test of changes in consumer demand, it is worth noting
that the evidence that I present provides only an indirect test of the effect that we should
expect in the primary market for Toyota vehicles.
The notion of consumer demand that is of interest in this paper is not simply the
demand curve in the secondary vehicle market. Instead, I am interested in consumer
perception of Toyota vehicles. In secondary markets, changes in consumer perception
affect both supply and demand. The methodology proposed here can isolate changes
in consumer perception because shocks to consumer perception have an unambiguous
effect on prices in secondary markets. For example, a negative shock causes the supply
of used Toyotas to increase because current owners sell and the demand for used Toyotas
to decrease because consumers perceive Toyota less favorably. Because both effects push
prices down, a negative shock to consumer perception can be measured using secondary
market prices.
There is a large literature on product safety in industrial organization (e.g.,
Daughety and Reinganum, 1995). Specific work on recalls have explored the role of
information (Reilly and Hoffer, 1983), reactions in the stock market (Jarrell and Peltzman,
1985), and highway safety (Bae and Benitez-Silva, 2011). Cases studies have analyzed
Tylenol (Dowdell et al., 1992), the food industry (Salin and Hooker, 2001), Firestone tires
(Copeland and Hall, 2011), and Chinese toys (Freedman et al., 2012). Most relevantly, the
automobile industry has received a great deal of attention in the recall literature. Barber
and Darrough (1996) and Nichols and Fournier (1999) compare the evolving reputations
of American and Japanese manufacturers, whereas Rupp and Taylor (2002) and Rupp
(2004) study the causes and effects of the most costly automobile recalls during the
period through 1998.
My contribution to this literature is a careful measure of the extent to which
consumer demand responds to information about the recalls of automobiles. I find
that the 2009–2010 Toyota recalls had small effects on the prices at which Toyota
vehicles resell. This result holds across numerous specifications and throughout the
entire period following the initial reporting on Toyota’s safety problems. To provide
context for these small effects, I repeat the analysis on a similar recall episode (the 1980s
safety recalls of the Audi 5000) and find that Audi vehicles suffered larger losses than
80 Journal of Economics & Management Strategy

Table I.
List of Recalls by Toyota Motors during 2009–2010
Vehicles
Date Part Affected Affected Country

November 2, 2009 Floor mats 3.8 million United States

November 26 Brake override system 4.2 million United States
January 21, 2010 Faulty accelerator pedals 2.3 million United States
January 27 Floor mats 1.1 million United States
January 29 Faulty accelerator pedals 1.8 million Europe, China
February 8 Brakes 436,000 Worldwide
February 8 Brake tubes 7,300 United States
February 12 Front drive shaft 8,000 United States
April 16 Spare tire carrier cable 600,000 United States
April 19 Stability control system 34,000 Worldwide
April 28 Stability control system 50,000 United States
May 21 Steering system 7,000 Japan
July 5 Value springs 270,000 Worldwide
July 29 Steering column 412,000 United States
August 28 Engine control modules 1.13 million United States, Canada

Notes: The number of vehicles affected are cumulative and includes vehicles also affected by previous recalls. For details, see Section 2 and the
cited references.

those of Toyota vehicles in 2009–2010 despite the similarities between the two recall
episodes.
I reconcile the small treatment effect of the Toyota recalls with the large treatment
effect of the Audi recalls by documenting a key difference between the two companies.
Although both companies had a reputation for producing high-quality vehicles at the
time of their recalls, Toyota had a better-established reputation, in the sense that Toyota
had been in the market longer and had a larger market share at the time of its sudden
unintended acceleration problems. These results suggest that the response of consumer
demand to negative product-quality information depends on the extent to which a
company’s reputation is established more so than it depends on a company’s reputation
for producing high or low-quality products. Before turning to an overview of the Toyota
recalls, note that this recall episode is unique in this literature in that these recalls allow
measurement of consumer perception for goods that were actually recalled. In contrast,
many previous studies considered events where the affected goods were completely
removed from the market and were no longer available for purchase.

2. The 2009–2010 Toyota Recalls

Before introducing the data and empirical methodology to be used, I briefly discuss the
events surrounding the recall of 9 million Toyota vehicles worldwide. Further details
can be found in any number of popular press treatments, including Mitchell (2009),
Vartabedian and Bensinger (2009), and MacKenzie and Evans (2010). See Table I for a
timeline of the recalls as well as Tables II and III for lists of recalled and unrecalled
vehicles, respectively, by the recalls during the period of interest.
On August 28, 2009, off-duty California Highway Patrol officer Mark Saylor and
three passengers were killed in California while driving a 2009 Lexus ES350. Multiple
media outlets report that the vehicle “suddenly” accelerated to speeds exceeding
Sudden Unintended Used-Price Deceleration? 81

Table II.
Recalled Vehicle Model Years in the Sample
Recall

Make Model Acc. Pedal Floor Mat Tire Cable Brakes

Lexus ES 350 2007–2010

Lexus IS 250 2007–2010
Lexus IS 350 2007–2010
Toyota Avalon 2007–2010 2007–2010
Toyota Camry 2007–2010∗ 2007–2010
Toyota Corolla 2009–2010∗ 2009–2010
Toyota Highlander 2010 2008–2010
Toyota Matrix 2009–2010 2009–2010
Toyota RAV4 2009–2010∗
Toyota Prius 2007–2010 2010
Toyota Sequoia 2008–2010
Toyota Sienna 2007–2010
Toyota Tacoma 2007–2010
Toyota Tundra 2007–2010 2007–2010
Toyota Venza 2009–2010

Notes: Shown are the model–model years that experience each specific major recall during 2009–2010. ∗ denotes that the recall was partial. The
accelerator-pedal recall for certain models in certain model years included only a subset of the vehicles sold, based on the vehicle’s vehicle
identification number (VIN). The remaining recalls involved every vehicle sold from the model years listed.

Table III.
Toyota Motors Vehicles that Experience No Recalls
Lexus Toyota

GX 460 LX 470 4Runner

GX 470 LX 570 FJ Cruiser
HS 250h RX 350 Land Cruiser
IS F RX 400h Solara
LS 460 RX 450h Yaris
LS 600h L SC 430

Notes: The above models from Toyota Motors did not experience any recall during the sample period for any of the model years 2007–2010.

100 miles per hour and emergency call records indicate that a passenger said that the
car’s brakes were no longer functioning. The crash investigation found that the wrong
floor mats were installed in the vehicle, which interfered with the accelerator pedal.
Toyota responded by initiating a recall and advising owners of its vehicles to remove
their floor mats immediately. The floor-mat recall of 3.8 million Toyotas was first reported
on September 29 and was officially announced by the company on November 2.
On October 18, the Los Angeles Times published an article addressing claims of
sudden unintended acceleration, the first in a series of widely covered articles. A follow-
up article in this series reported that Toyota had received more than 1,200 reports of
sudden unintended acceleration over the previous 8 years. Later on October 30, Toyota
mailed notices to owners of an impending recall to address issues related to sudden
unintended acceleration. Details of the recall were announced on November 26, when
the original floor-mat recall was widened to 4.2 million vehicles, covering these vehicles’
brake override systems to address sudden unintended acceleration.
82 Journal of Economics & Management Strategy

Aug, 2009 Sep Oct Nov Dec Jan, 2010 Feb Mar Apr

FIGURE 1. NUMBER OF STORIES IN THE GOOGLE NEWS INDEX

Notes: Google News does not provide an exact scale for their news index, but for perspective,
the month with the most news coverage was February 2010, when “about 1,440” news stories
mentioned the word “Toyota” and either of the words “mat” or “pedal.”

On December 26, another widely reported accident leaves four Texans dead in a
crash involving the sudden unintended acceleration of a Toyota Avalon whose floor
mats had been removed per Toyota’s instructions. The third Toyota recall of the period
followed on January 21, 2010 involving faulty accelerator pedals on 2.3 million vehicles
(of which 2.1 million vehicles were involved in the previous recall). Six days after this
third recall, Toyota expanded its floor-mat recall to include 1.1 million additional vehi-
cles. Finally, on January 26, Toyota announced that it would suspend sales of all vehicle
models affected by the January 21 pedal recall. The company also announced that it
would suspend production on the affected assembly lines for 1 week starting February 1.
To illustrate the timing of news coverage addressing the Toyota recalls, Figure 1
shows the number of news articles indexed by Google News matching the word “Toyota”
and either of the words “mat” or “pedal.” The peak of the coverage comes in February
2010, when (according to Google News) “about 1,440” related news stories covered
Toyota. For reference, consider two pop musicians who experienced significant news
coverage during February 2010. “Miley Cyrus” was mentioned in 1,870 stories, whereas
“Lady Gaga” was mentioned in 6,950 stories.

3. Panel Data on Used-Vehicle Prices

Data on the prices at which used vehicles sell in secondary markets were purchased
from the National Auto Research Division of the Hearst Business Media Corporation
(www.blackbookusa.com). These data are packaged as the Black Book and are used
by automobile dealers when purchasing vehicles at wholesale auctions to a much
larger extent than more widely known pricing guides (e.g., the Kelley Blue Book
(www.kbb.com ) or the National Automobile Dealers Association Used Car Guides
(www.nadaguides.com )). In fact, Black Book restricts purchases of its data products to
“industry-qualified businesses.” Although Black Book data contain information on an
individual vehicle’s wholesale, retail, and trade-in values, I use retail values to measure
the effect of recalls on consumer demand. Black Book wholesale prices are derived
from “hands-on Black Book surveyor data” from wholesale automobile auction houses
across the country, whereas their retail prices are derived from “data from manufactures,
captive lending sources, remarketing companies, banks, leasing companies, dealers, and
auctions” (Black Book, 2011).1
I define a vehicle to be a particular make-model–model year–trim level, which
implies that there are five vehicles in the sample that correspond to the five trim levels of

1. In total, the editorial staff at Black Book analyzes more than 200,000 separate records each month. These
figures and the sources for each price series were provided to me by the editorial staff at Black Book, in
particular managing editor Ricky Beggs.
Sudden Unintended Used-Price Deceleration? 83

Table IV.
Distribution of Used-Vehicle Prices over Time
Make Model Series Model Year Price Percentile

April 1, 2008; N = 88
Ford Focus ZX3 S 2007 $9,272.01 0
Toyota Corolla CE 2008 $12,591.85 25
Chrysler 300 Base 2007 $16,461.74 50
Hummer H3 Base 2007 $22,060.30 75
Lexus LS 460 L 2007 $56,496.37 100
August 1, 2009; N = 411
Chrysler PT Cruiser Base 2007 $7,605.75 0
Saturn Vue XE 2008 $13,354.06 25
GMC Envoy SLE 2008 $16,638.81 50
Lexus ES 350 2007 $22,758.60 75
Lexus LS 600h L 2009 $68,921.02 100
April 1, 2010; N = 492
Chevrolet Cobalt LS 2007 $7,026.59 0
Toyota Camry XLE 2007 $12,949.83 25
Nissan Maxima SE 2008 $16,588.95 50
Nissan Maxima S 2010 $23,131.61 75
Lexus LS 600h L 2010 $75,743.94 100

Notes: The three panels show the vehicles at each quartile of the constant-dollar used-price distribution for the first, middle, and last period in the
sample, respectively. The sample sizes shown are the number of vehicles in each period.

the 2010 Toyota Camry: Base, LE, SE, XLE, and Hybrid. For a particular vehicle, I record
the price at which it sold on average in used-vehicle markets for each month from April
2008 until April 2010. Table IV provides the distribution of used-vehicle prices for three
periods in the sample. The sample size increases over time, primarily because vehicles
enter the used-vehicle market in sufficient numbers for pricing data to become available.
But the lower number of vehicles in the initial month of the sample is also due to the
fact that only cars are included in the sample from April 2008 through December 2008,
whereas the full slate of cars, trucks, and sports-utility vehicles (SUVs) are included in
the sample from January 2009 through April 2010.
Vehicles in the 2007, 2008, 2009, and 2010 model years are included in the
sample. These model years encompass the vast majority of the models affected by
the Toyota recalls and comprise the majority of the used-vehicle market during the
same period. The automobile manufacturers to be studied were chosen to include the
largest manufacturers in the market, which were the following American manufacturers:
Chrysler, Ford, and GM; and foreign manufacturers: Honda, Hyundai, Nissan, and
Toyota.2 The sample of vehicles was selected by including a representative vehicle from
each manufacturer (i.e., the most common vehicle) in the following segments of the
market: subcompact, compact, midsize, full-size, sports, crossover SUV, SUV, and truck.
The final sample contains 7,937 observations, including 492 vehicles in total. Because
the Toyota recalls are the focus of the paper, a larger set of vehicles were sampled from
these four model years for the two brands of Toyota Motors: Lexus and Toyota.

2. The following brands were included in the sample: Chrysler: Chrysler and Dodge; Ford: Ford, Lincoln,
and Mercury; GM: Buick, Cadillac, Chevrolet, GMC, Hummer, Pontiac, and Saturn; Honda: Acura and Honda;
Hyundai: Hyundai; Nissan: Nissan; and finally, Toyota: Lexus and Toyota.
84 Journal of Economics & Management Strategy

To control for the importance of fuel efficiency in resale markets, data are included
on gasoline prices and the fuel economy of each vehicle under study (Li et al., 2009). In
particular, I construct a measure of each vehicle’s cost of driving miles per dollar [MP$]
by dividing its environmental protection agency (EPA) miles per gallon rating by the
dollar price of unleaded gasoline. Monthly gasoline prices (including taxes) are reported
by the US Energy Information Administration (www.eia.doe.gov). Before moving to the
econometric model, I note that each vehicle’s used price and its costs of driving (MP$)
are reported in constant 2000 dollars using the monthly Consumer Price Index.

4. Estimating the Effect of Recalls

The econometric approach follows Hammond (2010), who adapts the methodology of
Laporte and Windmeijer (2005). See those papers for full details but the basic approach
is relatively simple and requires only data on each vehicle’s used price and its costs of
driving. The approach does not require or utilize data on other observable covariates
that describe the vehicle’s engine size (e.g., horsepower and number of cylinders),
vehicle size (e.g., interior room and number of doors), or standard features (e.g., power
windows, doors, and locks). Instead, I use a fixed-effects estimation to control for all
time-constant vehicle-specific covariates, which is particularly useful because it controls
for time-constant vehicle-specific unobservables that affect consumer demand but are
not available to the econometrician.
I measure treatment effects according to the following specification:

Log(Priceit ) = β0 + Tt β + Tt wi θ + c i + it , (1)

where i denotes a particular vehicle and t denotes a particular month. T is a 25 by 25

identity matrix of time dummies for each of the 25 months; w is a dummy variable
that equals 1 if vehicle i is “treated” and equals 0 otherwise; c is a vehicle fixed effect,
controlling for unobserved characteristics that affect a vehicle’s price; β is the parameter
vector that measures how prices change over time, whereas θ is the parameter vector
of interest that measures how the prices of treated vehicles changes relative to control
vehicles. By analyzing the log of prices, I measure the recall treatment effect vector θ as
(approximately) a percentage change in decimal form.3
Treatment will be defined according to a particular objective. To measure the
effect of recalls, treatment will take two forms: first, let w equal 1 for recalled Toyota
vehicles, equal 0 for unrecalled Toyota vehicles, and equal 0 for non-Toyota vehicles. An
alternative approach is to let w equal 1 for all Toyota vehicles and equal 0 for non-Toyota
vehicles. Finding negative effects in the first approach but not the second approach, for
example, indicates that recalls matter but do not spread to the remaining vehicles in
the manufacturer’s fleet that are not recalled. The estimation uses the first difference of
Log(Priceit ) to eliminate serial correlation and addresses panel-level heteroskedasticity
with robust standard errors that are clustered by vehicle.

3. More precisely, the decimal form of the treatment effect of period t is equal to exp(θt ) − 1, which is
approximately equal to θt in decimal form (Halvorsen and Palmquist, 1980). Just as the approximation with
a continuous covariate works well when the incremental change is small, the approximation with a dummy
covariate works well when θ is close to zero. In particular, when θ ∈ [−0.05, 0.05], the difference between
exp(θt ) − 1 and θt is less than one-hundredth of 1%.
Sudden Unintended Used-Price Deceleration? 85

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FIGURE 2. AVERAGE USED-CAR PRICES BY MANUFACTURER AND MODEL YEAR

5. Evidence that the Toyota Recalls Did Not Have Large

Effects
Figure 2 displays the average prices for cars manufactured by each firm in the sample for
the 2007–2010 model years separately. Only cars are shown in these four panels because
only cars were included in the entire run of data from April 2008 through April 2010.
The patterns for trucks and SUVs for January 2009 through April 2010 are similar for
the comparisons of interest and are available upon request. Prices are volatile early in
the life of a particular model year because price data are only available once sufficient
transaction data are available from secondary markets. This volatility is most clearly seen
for 2008 model year vehicles prior to October 2008 and for 2010 model year vehicles prior
to January 2010.
More importantly, prices are relatively stable over time, will the 2007 model year
having the most pronounced downward trend. This stands in contrast to the typical
view of resale prices for durable goods falling over time as a vehicle’s value diminishes
with its remaining life. This fact points to an evolving secondary market for automobiles
that is increasingly competitive with the primary market. With this price stability in
mind, the general pattern across model years over time points toward the following
ranking of prices for each manufacturer in the sample, from highest to lowest: Toyota,
Honda, Nissan, GM, Ford, Chrysler, and finally, Hyundai. Recalled Toyota cars are less
expensive than unrecalled Toyota cars in the 2007 and 2008 model years; all 2009 and
2010 model year Toyota cars in the sample were recalled. The final point of interest from
Figure 2 is whether there is any break in the relative prices of Toyota cars around the
recall announcements. None is apparent, either from comparing unrecalled and recalled
Toyota cars or from comparing Toyota cars to non-Toyota cars. Although this suggests
86 Journal of Economics & Management Strategy

that the Toyota recalls did not have large effects, a more careful analysis of these data is
needed.
As a first pass at implementing the methodology of Section 4, I assign recalled
vehicles to the treatment group and unrecalled vehicles to the control group (including
unrecalled Toyotas and non-Toyota vehicles). The estimation exploits within-vehicle
variation across time and all vehicles (cars, trucks, and SUVs) are included. Results are
in Figure 3. The top panel displays the time trend of treatment effects for both groups
along with their 95% confidence intervals. The bottom panel differences these treatment
effects (recalled minus unrecalled) month by month and displays the 95% confidence
interval of the difference. The timeline of the Toyota recalls from Section 2 indicates that
we should look for the effect of the recalls starting in September 2009. The top panel
shows that, after controlling for observed and unobserved vehicle heterogeneity, prices
fall for all vehicles in November and December 2009 but to a much smaller extent than
they fell in November and December 2008. This indicates a clear seasonal trend in used-
vehicle prices. The fact the recalled vehicles did not experience outcomes that differed
in any way from the outcomes of unrecalled vehicles provides evidence that recalls do
not have a large effect on consumer demand.
An improved comparison to measure the effect of the Toyota recalls is in Figure 4.
The top panel shows the treatment effects for each manufacturer, separating unrecalled
and recalled Toyota vehicles. The bottom panel differences the Toyota treatment effects
(recalled minus unrecalled), including the 95% confidence interval of the difference.
Throughout 2009, recalled Toyotas hold their value better than unrecalled Toyotas but
the relevant question is whether there exist any discrete changes in the relative treatment
effects during the recall period. Recalled Toyotas lose around 1% of their price advantage
over unrecalled Toyotas in December 2009. The top panel shows that this occurs because
recalled Toyotas experienced a larger price drop from November to December than
unrecalled Toyotas. Furthermore, it appears that recalled Toyotas experienced a larger
price drop between these 2 months than any other manufacturer.
In a similar exercise, the top panel of Figure 5 shows each manufacturer’s treatment
effects, combining all Toyotas. The bottom panel differences the Toyota treatment effects
using Honda as a control group. I follow Hortaçsu et al. (2010) in choosing Honda; this
is for no reason other than the fact that Toyota and Honda are widely considered to be
each other’s closest competitors. Here I find that Toyota vehicles begin losing their value
relative to Honda vehicles in October 2009 and the effects persist for 3 months before
the two manufacturers’ prices return to parity at the beginning of 2010. Comparing this
trend to the trend of Toyota relative to Honda in the final months of 2008 suggests that
Toyota vehicles lose their values to a larger extent than Honda vehicles in the fourth
quarter of each year. The only month where Toyota looks anomalous in 2009 relative to
2008 is December, which is consistent with the findings from Figure 4.
Next, I refine the control group to exclude any non-Toyota vehicle that also experi-
enced a recall of its own. Using the National Highway Traffic Safety Administration
(NHTSA) database (http://www-odi.nhtsa.dot.gov/downloads), I remove the non-
Toyota vehicles that were included in Figure 5 that experienced any recall prior to 2011.
The results are in Figure 6; the only apparent difference is a slightly larger treatment
effect in December 2009 but that effect of −2.28% (standard error = 2.05%) is statistically
and quantitatively similar to the effect that does not exclude recalled non-Toyota vehicles
of −2.00% (standard error = 1.04%). I argue that these results are less informative than
those in Figure 5 because the non-Toyota recalls during this period received a tiny
fraction of the media scrutiny of the Toyota recalls and media scrutiny is the most logical
Sudden Unintended Used-Price Deceleration? 87

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FIGURE 3. (A) TIME TRENDS FOR UNRECALLED AND RECALLED VEHICLES
WITH 95% CONFIDENCE INTERVAL (B) RELATIVE TIME TREND FOR RECALLED
VEHICLES WITH 95% CONFIDENCE INTERVAL

driver of widespread consumer reaction. Nevertheless, it is reassuring that the results

from Figure 5 are quantitatively unchanged.4

4. All recalled non-Toyota vehicles are excluded, including some extremely small recalls (one-fourth of
those recalls affected fewer than 2,836 vehicles) and some nonsafety recalls (e.g., missing vehicle labels or
defective interior lights). Including only large recall campaigns that are related to safety problems confirms
that the results in Figure 5 are quantitatively unchanged.
88 Journal of Economics & Management Strategy

.05
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FIGURE 4. (A) TIME TRENDS BY MANUFACTURER, UNRECALLED AND RECALLED
TOYOTA VEHICLES SEPARATED (B) TIME TREND FOR RECALLED TOYOTA VEHI-
CLES RELATIVE TO UNRECALLED TOYOTA VEHICLES

I then reestimate the treatment effects over time separately for each of the 18 brands
in the sample and separately for the unrecalled and recalled vehicles of both the Lexus
and Toyota brands. Figure 7 shows the results for Lexus and Toyota in the top and
bottom panels, respectively. Although the relative positions of unrecalled and recalled
vehicles from the Toyota brand are remarkably constant throughout the recall period,
recalled Lexus vehicles fare approximately 2% better than unrecalled Lexus vehicles in
October 2009, fare similarly in November 2009, and fare approximately 2% worse in
December 2009. Figure 8 reports the treatment effects over time for Toyota and the other
Sudden Unintended Used-Price Deceleration? 89

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FIGURE 5. (A) TIME TRENDS BY MANUFACTURER, UNRECALLED AND RECALLED
TOYOTA VEHICLES COMBINED (B) TIME TREND FOR TOYOTA VEHICLES RELA-
TIVE TO HONDA VEHICLES

foreign manufacturers; the treatment effects for domestic manufacturers are suppressed
to conserve space but are available from the author upon request.
Combining the evidence in Figures 4–8 paints a picture of the 2009–2010 Toyota
recalls mattering primarily in December 2009 and primarily for vehicles of the Lexus
brand. The effects are smaller than 2.5% in all specifications and they are never outside
of the margin of error. If these recalls matter, they appear to have small effects that
are short lived and occur immediately after the initial burst of media reports covering
Toyota’s safety problems. That is, the effects are concentrated in December 2009 and not
in February 2010, when the negative media coverage reached its peak.
90 Journal of Economics & Management Strategy

.1 .05
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Hyundai Nissan Toyota

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(B)
FIGURE 6. (A) TIME TRENDS BY MANUFACTURER, UNRECALLED AND RECALLED
TOYOTA VEHICLES COMBINED (B) TIME TREND FOR TOYOTA VEHICLES RELA-
TIVE TO NON-RECALLED HONDA VEHICLES

5.1 Spillovers
The previous literature suggests that spillovers of the effects on Toyota to other manu-
facturers may be expected here (Grafton et al., 1981; Cawley and Rizzo, 2008; Freedman
et al., 2012). The presence of positive spillovers implies that Toyota’s competitors would
have benefited from Toyota’s recalls by increased demand for their vehicles. Positive
spillovers then suggest that the above estimation in fact overestimates the effect of the
Toyota recalls. Under the hypothesis that recalls matter, the prices of Toyota vehicles
will fall more rapidly and this price drop is the true treatment effect. But this hypothesis
Sudden Unintended Used-Price Deceleration? 91

.06 .04
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Unrecalled Recalled
Lexus Vehicles Only
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Unrecalled Recalled
Toyota Vehicles Only
(B)
FIGURE 7. (A) TIME TREND FOR UNRECALLED AND RECALLED LEXUS VEHICLES,
SEPARATELY (B) TIME TREND FOR UNRECALLED AND RECALLED TOYOTA VEHI-
CLES, SEPARATELY

also suggests that the prices of Toyota’s competitors should rise for two reasons: Toyota
vehicle owners replacing their current vehicles with competing brands and potential
Toyota consumers switching to competing brands. These arguments suggest that, if
recalls matter, my results overestimate their effects. Because I find that the Toyota recalls
did not have large effects, the overestimation problem instills a high degree of confidence
that the true effects of recalls are not large.
92 Journal of Economics & Management Strategy

.05
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Acura Honda Hyundai Nissan

L-Unrecalled L-Recalled T-Unrecalled T-Recalled

FIGURE 8. TIME TRENDS BY BRAND, FOREIGN-MADE VEHICLES

The presence of negative spillovers implies that Toyota’s competitors would have
been harmed from Toyota’s recalls by decreased demand for their vehicles. Negative
spillovers then suggest that the above estimation is masking the true effect of the Toyota
recalls. Negative spillovers would appear in the manufacturer-specific average price
trends in Figure 2 as discrete breaks in trend for multiple manufacturers coincident with
the Toyota recalls. A first hypothesis suggests that all foreign manufacturers should
face price drops following Toyota’s safety problems because consumers substituted to
domestic manufacturers. A second hypothesis suggests that all manufacturers should
face price drops following Toyota’s safety problems because consumers decided to delay
vehicle purchases altogether. Neither hypothesis is supported by Figure 2 for any model
year, leading me to conclude that the quantitatively small effects of the Toyota recalls
are not masking real effects that are present for multiple manufacturers in the market.

5.2 Robustness Results

The above results suggest that the 2009–2010 Toyota recalls had small negative effects
that disappear by the end of 2009. In this section, I provide several robustness checks
to support that basic conclusion. First, I show that different types of recalls matter in
different ways for Toyota during this period but the effects remain small nonetheless. As
detailed in Section 2, separate recalls addressed issues with floor mats and accelerator
pedals, yet most of the commentary focused on the accelerator-pedal issues as a
more serious safety problem. Confirming this intuition, the accelerator-pedal recalls
had larger effects, though both recalls had small effects and their differences are not
statistically significant. To perform this check, I rerun the analysis shown in Figure 4
using separate regressions for each recall type, where I compare recalled Toyotas that
were affected by a given recall to Toyotas that were not affected by any recall. For the
floor-mat recalls, the treatment effects in the 3 months where the effects are noticeable
(October, November, and December 2009) are 1.26%, −0.14%, and 0.08%. For the
Sudden Unintended Used-Price Deceleration? 93

accelerator-pedal recalls, the treatment effects in the same 3 months are 1.07%, −0.86%,
and −0.48%. Intuitively, the recall that was more dangerous had larger effects. The
novelty of these findings is that the effects are small and transient.
Second, I control for recalls with a measure of recall intensity instead of a recall
dummy. Of the 245 Toyota vehicles in the sample, 41.63% were not affected by any
of the recalls, 2.45% were affected by one recall, 41.63% were affected by two recalls,
and 14.29% were affected by three recalls. Since so few vehicles were affected by only
one recall, I compare (1) non-Toyota vehicles, (2) Toyota vehicles that experienced zero
recalls, (3) Toyota vehicles that experienced one or two recalls, and (4) Toyota vehicles
that experienced three recalls. The findings for recall intensity detect no differences in the
treatment effect of recalls depending on the number of recalls that affected a vehicle. The
treatment effects in the 3 months where the effects are noticeable (October, November,
and December 2009) are small and vehicles affected by three recalls fared no worse than
those affected by one or two recalls (1.18%, 0.04%, and 0.21% for one or two recalls vs.
1.55%, 0.61%, and 1.44% for three recalls, none of which are statistically different).
Third, I check the sensitivity of the results to the concern that a parametric
correction for serial correlation may suffer from misspecification. The main results use
the first difference of Log(Price it ) because the estimated autoregressive parameter ρ is
sufficiently high to be considered equal to one, thereby first differencing the dependent
variable. Bertrand et al. (2004) test a procedure that ignores the time-series variation
in the panel and simply averages the pre- and posttreatment periods for comparison.
The authors find that this approach can consistently estimate the standard errors in
difference-in-differences models. Applying their technique to the Toyota recalls requires
choosing a treatment date but I separately estimate the treatment effect of these recalls for
several candidate dates and find no evidence that recalls mattered. For December 2009,
I estimate a positive yet statistically insignificant treatment effect of 2.97% (standard
error = 2.56%).
Fourth, I estimate the treatment effect of the Toyota recalls using within-model
variation. Five Toyota models experienced recalls for some but not all four model
years during the sample: Corolla model years 2009–2010 were recalled, Highlander
(2008–2010), Matrix (2009–2010), RAV4 (2009–2010), and Sequoia (2008–2010). The
results for the subset of vehicles for which there is within-model variation (960
observations) echo the main findings: the treatment effects in the 3 months where the
effects are noticeable (October, November, and December 2009) are −0.57%, −1.62%, and
−1.60%. The treatment effect in each of these months is quantitatively small and only
the effect for November 2009 approaches statistical significance with a p-value of 0.16.
In summary, the small, short-lived effects of the Toyota recalls are robust to
controlling for the type of recall and the number of recalls that a particular vehicle
experienced. Furthermore, the estimation results are robust to an alternative specification
to handle serial correlation and to exploiting within-model variation in recalls instead
of the use of across-model variation in the main specification.

6. Comparison with the 1980s Audi Recalls

To provide context for these quantitatively small recall treatment effects, I repeat the
analysis on a similar recall episode: the 1980s safety recalls of the Audi 5000. Audi’s
midsize sedan was linked to several incidents of sudden unintended acceleration, reports
that closely mimicked those of Toyota vehicles more than two decades later. To maintain
94 Journal of Economics & Management Strategy

focus on the comparison with Toyota, full details of the Audi recalls are in the Appendix
and only a summary is provided here.
Why might Audi in 1986 face a different response to reports of sudden unintended
acceleration than Toyota did in 2009? The main difference between the two manu-
facturers during their respective episodes is that Audi was less familiar to American
automobile consumers in 1986 than Toyota was in 2009. First, Audi held a smaller share
of the American automobile market (1.70% for Audi’s parent company Volkswagen in
1986 vs. 16.73% for Toyota in 2009). Second, Audi had been in the American market for
a short time (since the 1970 model year) and had three vehicles (a subcompact, compact,
and midsize vehicle) in its lineup during the 17 years prior to its recall episode. In
contrast, Toyota had been present in the American market since the 1958 model year
(52 years) and had a full slate of six vehicles (covering each major automobile segment)
since the 1970s. As a result, consumer perception of Audi vehicles had not been fully
established when consumers were confronted with news of the manufacturer’s safety
problems. In contrast, consumer perception of Toyota vehicles was more solidified.
Although issues of sudden unintended acceleration with the Audi 5000 date back
to 1982, the peak in coverage and concern about the safety of Audi vehicles came on
November 23, 1986, when 60 Minutes covered the Audi 5000 in a segment entitled
Out of Control. Later, the US NHTSA found that all incidents that were investigated
(including those covered by 60 Minutes) were caused by pedal misapplication (i.e., the
driver confusing the gas pedal with the brake) and other types of driver error (Cremer
and Lavell, 2010). Despite this eventual vindication, media coverage intensified and
many reports indicated that consumers reacted to the increasing volume of negative
information about the Audi 5000’s safety record.
Full details of the Audi data and its analysis are in the Appendix. In summary, the
data come from the Automobile Red Book because Black Book data are not readily available
for the years covering the Audi recalls (National Market Reports, Inc., 1984–1987). I
collect data for the period between January 1, 1984 and November 15, 1987 (in 45-day
increments) on the retail used price for vehicles from 19 manufacturers for the 1982–1985
model years. Because the Audi 5000 is a midsize sedan, I collect the flagship midsize
sedan for the major American, Asian, and European manufacturers, using the Berry
et al. (1995) data to identify the key midsize sedans in the market at the time.
The main results from the Audi data show the Audi 5000 treatment effects
relative to the Volkswagen Quantum (Figure 9) and, separately, relative to the Volvo
240 (Figure 10). Volkswagen makes a natural comparison group because Audi is a brand
within the Volkswagen Group. Because negative information about the quality of Audi
vehicles may spread to its parent company, I also present results that compare the
Audi 5000 to its closest competitor, the Volvo 240.5 Individual manufacturers’ treatment
effects, additional results, and robustness checks for the Audi data are available from
the author upon request.
First, Figure 9 shows that the Audi 5000 and the Volkswagen Quantum experienced
large differences in their treatment effects during the entire 3-year period prior to the
60 Minutes recall coverage. Although these large swings in period-to-period effects
make it difficult to tell a consistent story, there is a clear break in their relative trend

5. The Audi 5000 and the Volvo 240 are each other’s closest competitors in the sense that, of the European
midsize sedans in the Berry et al. (1995) data, they have the closest list price ($17,710 for the 5000 vs. $15,985
for the 240, in current model-year dollars), engine size (136 cubic inches for the 5000 vs. 141 cubic inches for
the 240), horsepower (110 HP for the 5000 vs. 111 HP for the 240), and vehicle weight (2,844 pounds for the
5000 vs. 2,939 pounds for the 240). These figures are based on the 1985 model year for each vehicle.
Sudden Unintended Used-Price Deceleration? 95

60 Minutes Special

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Control Group: Volkswagen

FIGURE 9. AUDI RESULTS: TIME TREND RELATIVE TO VOLKSWAGEN VEHICLES

.1

60 Minutes Special
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Control Group: Volvo

FIGURE 10. AUDI RESULTS: TIME TREND RELATIVE TO VOLVO VEHICLES

after January 1, 1987. Audi’s negative treatment effects persist for the duration of 1987.
Second, Figure 10 shows that the Audi 5000 and the Volvo 240 have more constant relative
treatment effects in the pretreatment period; there is a clear break in trend beginning
November 15, 1986. The relative Audi treatment effects fluctuate until the end of 1987,
reaching a low of −6.3% on July 1, 1987. The separate Audi and Volkswagen treatment
effects (not shown) both fall in November 15, 1986, implying that both manufacturers
96 Journal of Economics & Management Strategy

experienced negative effects coincident with the height of the negative media coverage
of the (Volkswagen’s subsidiary) Audi recalls. The fact that the negative effects for
Volkswagen were smaller and less persistent than the negative effects for Audi can be
interpreted as evidence that Audi’s problems spread to its parent company in the early
stages of public concern but Audi alone suffered continued damage as it became clear
that only Audi vehicles were potentially unsafe.
The magnitude of the effects versus Volkswagen are −4.3%, −4.0%, −4.6%, and
−4.0% for the periods February 15, April 1, May 15, and July 1, 1986 (vs. Volvo, these
effects are −1.5%, −4.2%, −4.4%, and −6.3% for the same periods). These effects are both
larger and more persistent than the effect of the Toyota recalls that were found in the
previous section. Precise quantification of the effect of the Audi recalls require choosing
between the two control groups because of the differences in the exact onset of Audi’s
drop (earlier with Volvo as a control group) and the length of time that the negative
effects continued (more persistent with Volkswagen as a control group). For the purpose
of comparison with the Toyota recalls though, these results demonstrate that Audi
suffered larger losses that lasted longer than the Toyota losses despite the similarities
between the two recall episodes. However, it is worth pointing out that comparing
the Toyota and Audi recalls does not reveal statistically significant differences in each
pairwise test of equal treatment effects. As a result, the discussion in the next section
focuses only on the quantitative differences in the patterns of the two episodes.

7. Reconciling the Results from the Audi

and Toyota Recalls
The comparison presented here between the sudden unintended acceleration episodes
of Audi in 1986 and Toyota in 2009 was echoed by Business Week, who wrote that Audi
“spent 15 years rebuilding US sales after sudden-acceleration incidents in the 1980s
almost wiped out demand, a possible sign of the difficult times Toyota Motor Corp.
faces. Audi’s US deliveries plunged 83 percent by 1991 from their peak in 1985” (Cremer
and Lavell, 2010). The analysis presented in this paper confirms the large negative effects
of Audi’s recalls but contradicts the prediction of a similar path for Toyota more than
two decades later. In particular, I find that the 2009–2010 Toyota recalls had effects that
were quantitatively small and short lived.
In the same article, Business Week noted the primary difference between Audi and
Toyota that I argue explains the different outcomes that the two companies faced: “Audi
was then selling no more than 75,000 cars a year in the U.S. and was chipping away at
the market for higher-priced models. [In 2009], Toyota, the world’s largest automaker,
sold 17 percent of all cars in the U.S.” (Cremer and Lavell, 2010). Because Audi was
smaller and newer to American consumers when its safety problems were subject to
intense media scrutiny, Audi vehicles suffered larger and longer lasting losses following
the 60 Minutes coverage of the company’s sudden unintended acceleration issues than
did Toyota vehicles that had the same safety problems.
The contrast between Audi and Toyota highlights the role of information in
determining consumer demand for products that have the potential to fail with life-
threatening consequences. Recalls for the same safety issue are not treated equally;
instead, consumers update their beliefs regarding the quality of a manufacturer’s
products given their previous information set. Negative information about the quality of
the products from a company such as Audi in 1986 has the potential to be more damaging
Sudden Unintended Used-Price Deceleration? 97

than similar negative information about Toyota vehicles in 2009. The limited nature of
American consumers’ experiences with Audi prior to its recall episode drives the results
that I find, which helps to provide context for the quantitatively small negative effect of
the 2009–2010 Toyota recalls.

8. Conclusions and Relationship with Previous Work

Toyota’s resale prices demonstrate a quantitatively small response to a large-scale
safety recall that was sufficiently publicized to rank as one of the most covered news
stories of 2009–2010. There is a small price response to the Toyota recalls despite the
overwhelmingly negative media attention that the episode received, including pervasive
coverage of more than 30 deaths (some reports as high as 52 deaths) that were linked to
the safety problems with Toyota vehicles. To provide context for the size of the Toyota
recall effect, I measure the effect of an earlier sudden unintended acceleration recall of
Audi vehicles during the 1980s. Audi faced larger losses that were more persistent than
the smaller Toyota losses that I find. The comparison between the two recall episodes
highlights that media coverage is not the driving force behind the effects of a recall
in product markets. Though a comparable measure of coverage intensity is difficult
to produce because of the different media environments, the Toyota recalls arguably
received more attention than the Audi recalls. The primary difference between the two
recall episodes is that the earlier Audi recalls involved a company that had a small
consumer base and a limited history in the American market. Relative to the 1980s Audi
recalls, the 2009–2010 Toyota recalls of more than 9 million vehicles had small effects on
consumer demand because Toyota’s reputation was more established in the minds of
American consumers.
In contrast to these findings, three papers present evidence that an automobile
manufacturer’s reputation is a liability when facing a severe recall. Barber and Darrough
(1996) study the period from 1973 to 1992 and find that the losses in shareholder
wealth are largest for manufacturers like Honda and Toyota who have a reputation
for high-quality vehicles. Relatedly, Rupp (2004) finds shareholder losses are larger
for manufacturers with AAA bond ratings than for manufacturers in worse financial
condition. Finally, Rhee and Haunschild (2006) find that manufacturers with better
reputations lose more market share following a severe recall than those with worse
reputations. I argue that the previous literature measured a different characteristic of
a company’s reputation than the characteristic that I highlight. Specifically, I draw a
distinction between a well-established reputation (which is my focus) and a reputation
for high-quality products (which is the focus of the previous literature).
In interpreting the different outcomes faced by Audi in the 1980s and Toyota during
2009–2010, my focus is on the degree of certainty that consumers have in their quality
estimates of a manufacturer’s products, where the above papers focused on the level of
the quality estimates. Both Audi and Toyota were viewed as high-quality vehicles at the
time of their recalls. The difference is in the length and depth of their “track record,”
where Toyota had been in the market longer and had a larger market share at the time of
its sudden unintended acceleration problems. As a result, consumers had a more firmly
cemented view of Toyota vehicles by the onset of the negative media attention that the
company faced. This increased certainty in consumers’ view of Toyota vehicles in 2009
implied that there was less of a role for new information about the quality of their Camry,
for example. In contrast, consumers and potential consumers of Audi in 1986 had “little
to go on” when accessing the company, allowing Audi’s safety problems to resonate.
98 Journal of Economics & Management Strategy

The role implied by these results for policymakers is limited, in the sense that
consumers are found to have, generally speaking, responded in a way that is consistent
with rational economic models of decision making under incomplete information on
the quality of a durable good. Implications for business strategy are more clear-cut:
the comparison between Audi and Toyota demonstrates another reason for firmly
establishing a reputation in which consumers have a great deal of faith. Although
this recommendation is not novel, the distinction that has been highlighted between
a reputation that is well established and a reputation for high-quality products is new to
the literature on product quality. More research is needed to disentangle these effects.

Appendix: Additional Details on the Audi Data

The 1980s Audi recalls begin with the company’s first and second recalls of the Audi 5000
on April 16, 1982 and September 22, 1983, respectively. The first of these involved 96,000
1978–1982 Audi 5000 vehicles to install “accelerator pedal guides” to anchor the floor
mats (Stepanek, 1986). The second recall involved an additional 117,000 1978–1983 Audi
5000 automatic transmission vehicles to install a rubber brake pedal pad. Although these
recalls received press attention, Audi’s safety issues were largely ignored as subsequent
news reports on Audi (especially in 1985) focused on its increasing share of the American
automobile market (Stepanek, 1986).
The next wave of media attention on Audi’s sudden unintended acceleration issues
began on February 23, 1986, when reports covered an investigation into several incidents
with the Audi 5000 (Stuart, 1986). The first widespread call for the Audi 5000’s recall
occurred on March 19, 1986, when the consumer lobbyist group The Center for Auto
Safety claimed that the vehicle had a rate of one accident for every 500 vehicles sold
(Stepanek, 1986). Audi’s third recall of the decade occurred on May 29, 1986 involving
the accelerator pedals of 132,000 vehicles from the 1984–1986 model years (Darlin,
1986), whereas the fourth recall occurred on September 16, 1986 for a separate issue
concerning the potential for engine fires (Schlesinger and Karr, 1986). As pressure on
Audi intensified, the US National Highway Traffic Safety Administration (NHTSA)
urged Audi to recall 230,000 vehicles on December 23, 1986, a recall that Audi complied
with on January 14, 1987 (Mcginley, 1986).6 A final, sixth recall occurred on October 23,
1987.
The height of the negative media coverage of Audi came on November 23, 1986,
when 60 Minutes covered the Audi 5000 in a segment entitled Out of Control. The segment
featured interviews with six Audi 5000 owners who were involved in a lawsuit following
separate incidents of sudden unintended acceleration. Later, the US NHTSA found that
all incidents that were investigated (including those covered by 60 Minutes) were caused
by pedal misapplication (i.e., the driver confusing the gas pedal with the brake) and
other types of driver error. Furthermore, it was found that 60 Minutes placed a canister
of compressed air connected to the transmission with a hose, perhaps best described as
“sudden engineered acceleration” (Cremer and Lavell, 2010).
The Audi data come from the Automobile Red Book, the nation’s oldest (since 1911)
used-vehicle price guide (National Market Reports, Inc., 1984–1987). I collect data for
the period between January 1, 1984 and November 15, 1987 (in 45-day increments) on
the retail used price for vehicles from 19 manufacturers for the 1982 through 1985 model

6. For perspective, compare the 230,000 vehicles that Audi recalled to the 74,061 vehicles that the company
sold in the United States in 1985 (Cremer and Lavell, 2010).
Sudden Unintended Used-Price Deceleration? 99

years. Because the Audi 5000 is a midsize sedan, I collect the flagship midsize sedan for
the major American, Asian, and European manufacturers, using the Berry et al. (1995)
data to identify the key midsize sedans in the market at the time.7 The final Audi sample
contains 2,091 observations, including 76 vehicles in total. The Audi estimation controls
for fuel efficiency in the same way as with the Toyota data and each vehicle’s used price
and its costs of driving (MP$) are reported in constant 1983 dollars using the monthly
Consumer Price Index.

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100 Journal of Economics & Management Strategy

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