Is the Bankruptcy of Chrysler and GM “A Success of the Market System”?

Greg Mankiw looked up the Consumer Reports of ratings of car companies and found:

Dead last was Chrysler. CU recommended zero percent of the Chrysler vehicles they tested. That’s right–zero. Second to last was General Motors. CU recommended 17 percent of GM models. By contrast, most other companies had half or more of their models get the thumbs up. Honda was the top ranked brand; CU recommended 95 percent of its models.

Mankiw writes:

Is it any surprise that Chrysler and GM are now in the process of going out of business? From the perspective of the Consumer Reports advice, it looks like their business model was to count on the ignorance of the buying public about the quality of their products. Their bankruptcy should perhaps be viewed as a success of the market system.

This makes sense to me, but I wonder if it explains too much. Presumably these companies have been making crappy cars for awhile. How did the companies stay alive so long? In all seriousness, perhaps the market system would’ve been more successful had it shut down those companies 10 or 15 years ago.

Beyond this is the principal-agent problem, or moral hazard, or whatever it’s called, by which the people who make the decisions to make crappy cars are probably not actually going broke themselves: the companies might fall apart, but they’ll do OK, I assume. So I can see how the companies could stay alive for awhile, living off their assets and their ability to borrow money. I just don’t completely see it as a “success of the market” that they’ve been hanging on so long when the low quality of their products has been public knowledge.

About Andrew Gelman 26 Articles

Affiliation: Columbia University

Andrew Gelman is a professor of statistics and political science and director of the Applied Statistics Center at Columbia University. He has received the Outstanding Statistical Application award from the American Statistical Association, the award for best article published in the American Political Science Review, and the Council of Presidents of Statistical Societies award for outstanding contributions by a person under the age of 40.

His books include Bayesian Data Analysis (with John Carlin, Hal Stern, and Don Rubin), Teaching Statistics: A Bag of Tricks (with Deb Nolan), Data Analysis Using Regression and Multilevel/Hierarchical Models (with Jennifer Hill), and, most recently, Red State, Blue State, Rich State, Poor State: Why Americans Vote the Way They Do (with David Park, Boris Shor, Joe Bafumi, and Jeronimo Cortina).

Andrew has done research on a wide range of topics, including: why it is rational to vote; why campaign polls are so variable when elections are so predictable; why redistricting is good for democracy; reversals of death sentences; police stops in New York City, the statistical challenges of estimating small effects; the probability that your vote will be decisive; seats and votes in Congress; social network structure; arsenic in Bangladesh; radon in your basement; toxicology; medical imaging; and methods in surveys, experimental design, statistical inference, computation, and graphics.

Visit: Andrew Gelman's Website

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