Volkswagen - The Failure of Perfection and Moral Hazard: What Price Victory?

Abstract

In the year 2015, it became publically known that Volkswagen employees created and deployed software designed to thwart emissions testing equipment, and in this paper, we use moral hazard theory to explain the causes of employees’ motivation. Volkswagen employees’ high internal locus of control and high elasticities of behavior to rewards were united with executives’ low expectations of disclosure and high expectation of rewards to create strong incentives to use deceitful emissions systems. Employees’ engaging in utilitarian, moral hazard based behaviors succeeded in increasing revenue for many years. Subsequent to disclosure of the deceit, Volkswagen’s short-term and longterm financial performance were negatively impacted. Volkswagen’s goal to be the largest automobile supplier in the United States was unattainable by ethical means, but employees’ nevertheless pursued that goal which ultimately led to a significant decrease in company performance as measured by stock price and market capitalization.