Differentiation in Food Safety Ginger Z. Jin University of Maryland (based on joint work with Phillip Leslie at Stanford)

Food Safety = the impact of food intake on health risk Short run – throw-up, food poisoning hygiene Long run – obesity, heart attack, diabetes nutrition contents production methods What Do I Mean by Food Safety?

Two Meanings of Differentiation Actual difference in food safety

A Case Study of Los Angeles Restaurants Nov , 1997 CBS 2 News Behind the Kitchen Door January 16, 1998, LA county inspectors start issuing hygiene grade cards A grade if score of 90 to 100 B grade if score of 80 to 89 C grade if score of 70 to 79 score below 70 actual score shown Grade cards are prominently displayed in restaurant windows Score not shown on grade cards

Actual Differentiation

First Cut Major impacts after grade cards (GC) dramatic increase in hygiene quality decrease in the dispersion of hygiene quality revenue more responsive to hygiene grade food-borne illnesses drop 20% More information less differentiation

Why Differentiate After GC? Information is equal Different cost to maintain good hygiene Burger, Chinese cuisine, Sushi Bar Different benefit from good hygiene consumer willingness to pay for good hygiene local competition

Why Differentiate Before GC? Consumers know nothing no restaurant bothers to maintain good hygiene pure noise Consumers know everything restaurants choose to be dirty or be clean no response to GC Consumers have lousy information equally lousy everywhere dispersion in the amount of information noise

Depends on the extent of consumer learning chain affiliation => possible free-riding for franchisees degree of repeat customers in local region => regional clustering in hygiene quality How Could Information Differ Before GC?

Basic evidence - chain affiliation

Variation Across Chains

Statistically... chains have better hygiene than independent restaurants company-owned chain units have better hygiene than franchised units better hygiene if a chain has a greater number of units in LA county better hygiene if a chain has a greater % of units in LA county

Repeat Customers-- Santa Monica before GC Upper 1/3Lower 1/3

Statistically... better hygiene in heavy retail districts better hygiene in hotel districts worse hygiene in recreational districts no difference in white-collar employment districts no difference as to whether competes with at least one chain in the same census tract

Region clustering before GC

Regional clustering after GC

Statistically... Significant regional clustering in information structure Different information structures lead to different reputation incentives, thus different hygiene quality

Summary - Information Matters! Large impact of GC suggests low degree of consumer learning for most restaurants before GC No voluntary revelation before GC, although the inspection records are public Zagat restaurants only slightly better in hygiene Chain affiliation is an effective source of information A small degree of franchisee free-riding Regional differences in the degree of consumer learning impact hygiene quality for independent restaurants Bottom line: only 25% A restaurants before GC, now is over 80%

1. Why is National Restaurant Association against GC? 2. Why dont other counties adopt the same GC policy? Two Remaining Questions

Lessons From Other Markets Voluntary disclosure of HMO quality is incomplete and provides extra tools for HMOs to differentiate (Jin RAND) Grade card regulation may lead to patient selection (Dranove et al. JPE) or inspector bias (Jin and Leslie in progress) Private certifiers have strong incentives to differentiate in grading precision and grading criteria (Jin, Kato and List 2004)