Captive Regulators: Toyota Edition

Toyota's is the most recent high-profile case of regulatory capture and the one that gave me that last little push to start this blog.

One would think that a profit-seeking entity not involved in the sale of tobacco products would also try to avoid killing its customers, because manslaughter tends to be expensive and a bit of a PR hit. Toyota has shown once again that this is not always the case.

The story goes that Toyota knew that its cars had a tendency to accelerate randomly without any input from the driver. Once Toyota had received multiple reports about this life-threatening problem, it had to decide what to do about it. One option was to fix the problem and initiate a recall. The other was to cover it up: hire some people from the regulatory body that controlled investigations into these sorts of things (the NHSTA) and have them smooth it over. Toyota chose the latter route, despite the fact that a problem like this will almost always be more expensive the longer you take to deal with it, because of the potential fines, criminal investigations, and the additional cars to recall. There is a chance that the problem will never be uncovered in such a public way, in which case the ill-gotten profits would be Toyota's to keep, but this is a very risky proposition.

Why then did Toyota choose the more risky/costly option? The widespread bias towards short-term profits among publicly-traded companies most likely played a key role. The quarterly reporting format puts intense pressure on companies to meet or beat quarterly profit expectations. While fixing the problem when it was identified would ultimately have been cheaper, it would have hurt short-term profits or turned them to losses. Time and time again, companies have shown that they will seek short-term profits at the expense of their long-run well-being. It is often up to regulators to counter this bias.

Bloomberg