1 G604 IO II G604 IO II Eric Rasmusen, Eric Rasmusen, 25 April 2006 Jin and Leslie

2Readings 25 April, Tuesday. Mandatory Disclosure Ginger Jin and Phillip Leslie (2003): "The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards," Quarterly Journal of Economics, 118(2): (May 2003). Here are my transparencies. 25 April, Tuesday. Mandatory Disclosure Ginger Jin and Phillip Leslie (2003): "The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards," Quarterly Journal of Economics, 118(2): (May 2003). Here are my transparencies.Phillip Leslie "The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards,"transparencies.Phillip Leslie "The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards,"transparencies.

3 Central Question: The central question of this study is: when there is an increase in the provision of information to consumers about firms products (e.g. product quality information), does this cause firms to change their behavior (e.g. improve their product quality?) The dataset has exogenous variation, via 3 regimes: 1. Voluntary disclosure without a standard format 2. Voluntary disclosure with a standard format 3. Mandatory disclosure with a standard format

4 The Literature Stigler (1961) Search paper Stigler (1961) Search paper Nelson (1970) Advertising Nelson (1974) Ads as signals Benham (1972) eyeglass advertising bans Mathios (2000) J. of Law and Economics, salad dressing fat content. Demand fell for salad dressing.

5 History July 1, 1997: Subjective part of inspection report eliminated. July 1, 1997: Subjective part of inspection report eliminated. November : TV three-part report on unclean restaurant kitchens December 16, 1997: Los Angeles County Board of Supervisors unanimously votes for a grade card ordinance January 16, 1998: All restaurants get grade cards. In unincorporated parts of LA County, and some incorporated parts, restaurants must post the grade cards. January 16, 1998: All restaurants get grade cards. In unincorporated parts of LA County, and some incorporated parts, restaurants must post the grade cards.

6 1. The grade of each restaurant 1. The grade of each restaurant 2. Restaurant revenue, by quarter, from sales tax data 2. Restaurant revenue, by quarter, from sales tax data 3. People admitted to the hospital for food and non-food digestive disorders each month, by 3-digit zip code 3. People admitted to the hospital for food and non-food digestive disorders each month, by 3-digit zip code Data

7 Conclusions (p. 410) 1. No restaurants voluntarily disclosed their quality before the grade cards 2. Quality rose with the new grade cards, whether disclosure was voluntary or mandatory 3. Mandatory disclosure made quality rise more 4. Prices went down and output rose, in addition to the quality increase

8 More on Conclusions (p. 410) 1. Before the cards, revenue was precisely insensitive to score. 2. After the cards, scores rose 5%. 3. After the cards, an A grade made revenue 5% higher than a B-grade. 4. Illnesses fell 20% after grade cards, and this was not fully explained by a shift from one restaurant to another.

9 Data 13,544 restaurants 23,921 Went to 17,284, went to 13,544

10 mandatory No grade cards voluntary

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12 Quality rose after grade cards were introduced.

13 Restaurant fixed effects Restaurant chars. variables Why not city fixed effects? THE BIG REGRESSION! 3.9% 5.3%

14 Robustness Checks (p. 426) 1. Transform Score using a logit transform, to lie between 0 and 100 (bounded support problem) Omit restaurants that exited Estimate the regressions separately for each quarter (made some difference to size)

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16 Food poisoning went down except Nonfood didnt much. DATA

17 REGRESSION How about a time dummy?

18 A link to the course website