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G604 IO IIG604 IO II Eric Rasmusen, erasmuse@indiana.eduEric Rasmusen, erasmuse@indiana.edu

25 April 200625 April 2006

Jin and LeslieJin and Leslie

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ReadingsReadings

25 April, Tuesday. 25 April, Tuesday. Mandatory Disclosure Mandatory Disclosure

    Ginger Jin and     Ginger Jin and Phillip Leslie Phillip Leslie (2003): (2003): "The Effect of Information on Product Quality: Evidence from Restaurant Hygiene"The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards," Grade Cards," Quarterly Journal of Economics,Quarterly Journal of Economics, 118(2): 409-451 (May 2003). 118(2): 409-451 (May 2003).    Here are my     Here are my transparencies. transparencies.

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Central Question:Central Question:““The central question of this study is: when there is an increase The central question of this study is: when there is an increase

in the provision of information to consumers about firms’ in the provision of information to consumers about firms’ products (e.g. product quality information), does this cause products (e.g. product quality information), does this cause firms to change their behavior (e.g. improve their product firms to change their behavior (e.g. improve their product quality?)” quality?)”

The dataset has exogenous variation, via 3 regimes:The dataset has exogenous variation, via 3 regimes:

1. Voluntary disclosure without a standard format1. Voluntary disclosure without a standard format

2. Voluntary disclosure with a standard format2. Voluntary disclosure with a standard format

3. Mandatory disclosure with a standard format3. Mandatory disclosure with a standard format

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The LiteratureThe Literature Stigler (1961) Search paperStigler (1961) Search paper

Nelson (1970) AdvertisingNelson (1970) Advertising

Nelson (1974) Ads as signalsNelson (1974) Ads as signals

Benham (1972) eyeglass advertising bansBenham (1972) eyeglass advertising bans

Mathios (2000) J. of Law and Economics, salad dressing fat Mathios (2000) J. of Law and Economics, salad dressing fat content. Demand fell for salad dressing. content. Demand fell for salad dressing.

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HistoryHistory July 1, 1997: Subjective part of inspection report eliminated. July 1, 1997: Subjective part of inspection report eliminated.

November 16-18 1997: TV three-part report on unclean November 16-18 1997: TV three-part report on unclean restaurant kitchensrestaurant kitchens

December 16, 1997: Los Angeles County Board of December 16, 1997: Los Angeles County Board of Supervisors unanimously votes for a grade card ordinanceSupervisors unanimously votes for a grade card ordinance

January 16, 1998: All restaurants get grade cards. In January 16, 1998: All restaurants get grade cards. In unincorporated parts of LA County, and some incorporated unincorporated parts of LA County, and some incorporated parts, restaurants must post the grade cards. parts, restaurants must post the grade cards.

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1. The grade of each restaurant1. The grade of each restaurant

2. Restaurant revenue, by quarter, from 2. Restaurant revenue, by quarter, from sales tax datasales tax data

3. People admitted to the hospital for 3. People admitted to the hospital for food and non-food digestive disorders food and non-food digestive disorders each month, by 3-digit zip codeeach month, by 3-digit zip code

DataData

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Conclusions (p. 410)Conclusions (p. 410)

1. No restaurants voluntarily disclosed their quality before the grade 1. No restaurants voluntarily disclosed their quality before the grade cardscards

2. Quality rose with the new grade cards, whether disclosure was 2. Quality rose with the new grade cards, whether disclosure was voluntary or mandatoryvoluntary or mandatory

3. Mandatory disclosure made quality rise more 3. Mandatory disclosure made quality rise more

4. Prices went down and output rose, in addition to the quality 4. Prices went down and output rose, in addition to the quality increaseincrease

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More on Conclusions (p. More on Conclusions (p. 410)410)

1. Before the cards, revenue was “precisely insensitive” to score. 1. Before the cards, revenue was “precisely insensitive” to score.

2. After the cards, scores rose 5%. 2. After the cards, scores rose 5%.

3. After the cards, an A grade made revenue 5% higher than a B-3. After the cards, an A grade made revenue 5% higher than a B-grade.grade.

4. Illnesses fell 20% after grade cards, and this was not fully 4. Illnesses fell 20% after grade cards, and this was not fully explained by a shift from one restaurant to another.explained by a shift from one restaurant to another.

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DataData

13,544 restaurants13,544 restaurants

23,921 Went to 17,284, went to 13,544

1010

mandatory

No grade cards

voluntary

1111

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Quality rose after grade cards were introduced.

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Restaurant fixed effects

Restaurant chars. variables

Why not city fixed effects?

THE BIG REGRESSION!

3.9%5.3%

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Robustness Checks (p. 426)Robustness Checks (p. 426)

1.1. Transform Score using a logit Transform Score using a logit transform, to lie between 0 and transform, to lie between 0 and 100 (bounded support problem)100 (bounded support problem)

2.2. 2. Omit restaurants that exited.2. Omit restaurants that exited.

3.3. 3. Estimate the regressions 3. Estimate the regressions separately for each quarter (made separately for each quarter (made some difference to size)some difference to size)

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1616Food poisoning went down except 1998. Nonfood didn’t much.

DATA

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REGRESSION

How about a time dummy?

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A link to the course websiteA link to the course website

http://www.rasmusen.org/g604/0.g604.http://www.rasmusen.org/g604/0.g604.htmhtm