More Emissions Violators is Good News for Volkswagen

The chattering classes are puzzled as to why Volkswagen stock has rebounded so strongly in recent weeks, up 30% on no apparent news:

Furthermore, at the same time, it has come to light that additional manufactures have emissions violations, namely Audi, Mercedes-Benz, Honda, Mazda, and Mitsubishi.

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Intuitively, one would expect this to be worse news for Volkswagen, but obviously the stock has taken it in stride, surging in spite of these revelations.

So what’s going on here?

It’s very simple…imagine you’re in school and you turn in an assignment late. The teacher may fail you. Now what happens if everyone in class turns it in late. The teacher will probably compromise; he can’t fail everyone. It’s bad for his career having having a class where everyone fails, and parents will get mad too. The result is everyone gets off easier…it’s like the prisoner’s dilemma, where cooperation produces the best outcome.

So in the past three weeks there have been more emissions offenders which, analogous to the student example, possibly lessens the punishment for each manufacturer, including Volkswagen, since the emissions standards may have been too high to begin with.

Having more offenders makes the whole thing messier for the government. Cars are a big part of the US economy and a large source of jobs, since foreign car manufacturers build plants in America. The government isn’t going to cripple a major part of the economy over an overzealous emissions standard, so likely a concession will be made that results in an outcome for Volkswagen that isn’t as bad as originally feared.

For someone who wants buys a Volkswagen, his second-best preference is likely be Audi, Mercedes Benz, or some other European manufacturer. This is good news because Volkswagen having its competitors also recalled and fined is better for Volkswagen than just having Volkswagen recalled and fined.

But another possibly is that the stock was oversold and due for a recovery.

Just another example of the weird, counterintuitive world of economics.

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