DP12504 Firms and Collective Reputation: a Study of the Volkswagen Emissions Scandal

Author(s): Rüdiger Bachmann, Gabriel Ehrlich, Ying Fan, Dimitrije Ruzic
Publication Date: December 2017
Date Revised: August 2019
Keyword(s): automobiles, collective reputation, Demand estimation, difference-indifferences, Google trends, reputation externalities, Twitter sentiment, Volkswagen emissions scandal
JEL(s): D12, D22, D90, L14, L15, L62
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12504

This paper uses the 2015 Volkswagen emissions scandal as a natural experiment to provide evidence that collective reputation externalities matter for firms. We find that the Volkswagen scandal reduced the U.S. sales of the other German auto manufacturers- BMW, Mercedes-Benz, and Smart-by about 105,000 vehicles worth $5.2 billion. The decline was principally driven by an adverse reputation spillover, which was reinforced by consumer substitution away from diesel vehicles and was partially offset by substitution away from Volkswagen. These estimates come from a model of vehicle demand, the conclusions of which are also consistent with difference-in-differences estimates. We provide direct evidence on internet search behavior and consumer sentiment displayed on social media to support our interpretation that the estimates reflect a reputation spillover.