Up with Uncertainty, Down with Demand: How do information shocks impact automotive purchasing behavior?
Dr. Sarah Estelle, Economics
As a result of an information shock, when new consumer information becomes available in a market characterized by information asymmetry, the consumer must alter his purchasing behaviors in light of that new information to effectively maximize utility. Understanding these changes in purchasing behavior allows firms to react more proactively when information shocks occur, which could lead to more effective profit maximization through reduced forecasting errors and optimized resource allocation. When third-party ratings—such as EPA tests of automobile emissions or lab results for nutritional supplement purity—are called into question by an information shock, the market may respond to the new information on the particular good, but also with increased uncertainty about related products. This research examines vehicle sales data to ascertain the impact of an uncertainty-increasing information shock on a particular vehicle make on sales across brands and automotive segments. The revelation through routine re-testing in 2015 that Volkswagen AG diesel emissions were inconsistent with EPA test results provides the random variation necessary for a modified difference-in-differences strategy using interaction terms to identify the direct effect of the information on diesel vehicle sales for Volkswagen AG. Indicators for country of origin, brand, fuel type, and vehicle category allow for the evaluation of spillover effects generated throughout the industry as a result of the increased uncertainty. The analysis concludes that Volkswagen AG diesels and other non-Volkswagen AG, German diesels experienced a statistically significant decrease in monthly sales volume as a result of the information shock. The impact on non-German diesel vehicles, non-diesel Volkswagen, and other German non-diesel vehicles is statistically indistinguishable from zero.
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