I Can’t Get No Compensation: What Determines Product Recall Compensation?

Product recalls involving global supply chains provide managers an opportunity to attribute blame to foreign suppliers, and thus decrease compensation offered to consumers. In this paper, we examine the factors that determine the compensation firms offer to customers, when recalling products. Drawing on attribution theory, we argue that companies avoid responsibility and reduce compensation when recalls are severe and when the problem locus lies outside the boundaries of the firm, particularly in offshored manufacturing operations. We also contend that firms with higher reputations provide more compensation, but may reduce compensation with experience. We tested our hypotheses on a dataset of U.S. toy recalls during a twenty year period (1988-2007) and found support for our arguments. We discuss the implications of our findings for organization researchers, managers, regulators and consumers.