Journal of Economic Literature (JEL) Code(s)
We propose an instrumental-variable (IV) approach to estimate the causal eﬀect of service satisfaction on customer loyalty, by exploiting a common source of randomness in the assignment of service employees to customers in service queues. Our approach can be applied at no incremental cost by using routine repeated cross-sectional customer survey data collected by ﬁrms. The IV approach addresses multiple sources of biases that pose challenges in estimating the causal eﬀect using cross-sectional data: (i) the upward bias from common-method variance due to the joint measurement of service satisfaction and loyalty intent in surveys; (ii) the attenuation bias caused by measurement errors in service satisfaction; and (iii) the omitted-variable bias that may be in either direction. In contrast to the common concern about the upward common-method bias in the estimates using cross-sectional survey data, we ﬁnd that ordinary-least-squares (OLS) substantially underestimates the casual eﬀect, suggesting that the downward bias due to measurement errors and/or omitted variables is dominant. The underestimation is even more signiﬁcant with a behavioral measure of loyalty–where there is no common methods bias. This downward bias leads to signiﬁcant underestimation of the positive proﬁt impact from improving service satisfaction and can lead to under-investment by ﬁrms in service satisfaction. Finally, we ﬁnd that the causal eﬀect of service satisfaction on loyalty is greater for more diﬀicult types of services.
Huang, Guofang and Sudhir, K., "The Causal Effect of Service Satisfaction on Customer Loyalty" (2019). Cowles Foundation Discussion Papers. 80.