Essay Undergraduate 1,226 words

Volkswagen Emissions Fraud: Bias and Moral Hazard

~7 min read 6 sections Ethics · Business Ethics

Abstract

This paper examines the Volkswagen emissions fraud scandal, commonly known as "Dieselgate," by identifying the cognitive and structural biases that drove executive decision-making. Using the conduct of former CEO Martin Winterkorn as a central case study, the paper explores conflicts between shareholder duty and public obligation, the distorting effects of equity-based compensation, and the role of moral hazard in enabling long-term fraud. The analysis draws on rational choice theory and corporate governance ethics to explain how Volkswagen's Board contributed to the scandal by rewarding the very behavior that produced it, and considers what structural changes could have prevented the misconduct.

Key Takeaways

Introduction: The Volkswagen Emissions Scandal: Overview of the Dieselgate emissions cheating scheme
Biases Driving Executive Decision-Making: Competing duties and personal gain biases analyzed
The Risk-Reward Equation and Accountability Gap: How low legal risk encouraged fraudulent behavior
Alternative Paths and Missed Opportunities: Board and CEO decisions that could have prevented fraud
Executive Compensation and Moral Hazard: Equity pay structures enabling short-term unethical choices
Conclusion: Board responsibility and moral hazard as root causes

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What makes this paper effective

Grounds abstract ethical concepts — moral hazard, rational choice theory, shareholder vs. stakeholder duty — in a specific, well-documented real-world case, making the analysis concrete and credible.
Traces the fraud to its structural roots (executive compensation design, Board promotion decisions) rather than attributing misconduct solely to individual moral failure, demonstrating systems-level thinking.
Uses a comparative analogy (Pablo Escobar and extradition fear) to illustrate the risk-reward calculus in a memorable and accessible way.

Key academic technique demonstrated

The paper applies a layered ethical analysis, distinguishing between legal duty, fiduciary duty, and ethical duty to non-shareholder stakeholders, and shows how these competing obligations create exploitable gaps. This multi-level framework, supported by source citations, is the paper's central analytical contribution.

Structure breakdown

The paper opens by establishing the factual background of the scandal, then identifies the biases at work. It next examines the risk-reward environment that enabled the fraud, followed by a counterfactual section on how different decisions could have interrupted it. A focused section on compensation structure and moral hazard provides the structural explanation, and a concise conclusion assigns responsibility at both the individual and Board levels.

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Essay 1,226 words

Introduction: The Volkswagen Emissions Scandal

Volkswagen produced vehicles equipped with emissions controls designed to shut off once the cars had passed regulatory tests. As a result, the cars polluted significantly more in real-world conditions than in those tests. The company also benefitted financially from the test results, because they made Volkswagen's diesel engines appear less polluting than gasoline ones. The consequences were far-reaching: the public was misled, the company became eligible for subsidies that gave it a competitive advantage, and many consumers may have chosen to purchase a Volkswagen specifically because of the vehicles' apparently superior emissions performance (Parloff, 2018).

5 Sections Hidden · 865 words

Biases Driving Executive Decision-Making230 words

Several distinct biases were at play in the Volkswagen case. The first concerns the motivations behind executive action. The company's senior…

The Risk-Reward Equation and Accountability Gap135 words

Compounding the problem was the fact that Winterkorn and other executives were unlikely to face trial in Germany, and because of extradition laws they were likely to remain free from prosecution. At most, they faced a financial penalty — and the rewards…

Alternative Paths and Missed Opportunities230 words

There are several ways this situation could have been prevented, by guiding executives toward a different course of action. The first would have been not to hire Winterkorn in the…

Executive Compensation and Moral Hazard200 words

One of the core issues raised by this case is the tension that equity-based compensation creates between short-term and long-term executive interests. Senior executives typically receive direct equity-based compensation, or they have bonuses…

Conclusion70 words

The Volkswagen emissions fraud was the product of moral hazard, which in turn was generated by a bias toward self-serving actions that were never effectively counterbalanced by incentives aligned with either long-term shareholder interests or the interests of non-shareholder stakeholders. As such, Volkswagen's Board of Directors bears a substantial share of…

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References

Ganti, A. (2019). Rational choice theory. Investopedia. Retrieved January 18, 2020, from https://www.investopedia.com/terms/r/rational-choice-theory.asp

Palmiter, A. (no date). Corporate governance as moral psychology. In possession of the author.

Parloff, R. (2018). How VW paid $25 billion for Dieselgate — and got off easy. Business Ethics. Retrieved January 18, 2020, from https://business-ethics.com/2018/02/08/1638-how-vw-paid-25-billion-for-dieselgate-and-got-off-easy/

Smith, A. (2018). Volkswagen ex-CEO charged with fraud in diesel emissions scandal. CNN. Retrieved January 18, 2020, from https://money.cnn.com/2018/05/03/news/companies/winterkorn-vw-diesel-scandal/index.html

Key Concepts in This Paper

Moral Hazard Executive Bias Emissions Fraud Rational Choice Shareholder Duty Corporate Governance Equity Compensation Stakeholder Conflict Dieselgate Sarbanes-Oxley