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

This paper investigates the economic significance of collective reputation externalities using the 2015 Volkswagen (VW) emissions scandal as a natural experiment. Employing difference-in-differences and structural demand estimation methods, the study finds that the scandal caused a substantial reputational spillover effect on other German automakers (BMW, Mercedes-Benz, and Smart), resulting in an average $2,057 decline in consumer valuations and a 34.6% reduction in their annual U.S. sales. This negative spillover coexisted with a substitution effect, where some consumers shifted purchases away from VW toward other German brands, partially offsetting losses. Supplementary evidence from Twitter sentiment and Google search data supports the interpretation that the spillover arose from a shared "German engineering" collective reputation rather than from consumer beliefs about malfeasance by other German manufacturers. The findings highlight the economic importance of collective reputations and suggest implications for regulatory policy concerning firm behavior and mergers.