The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards

Abstract

This study examines the effect of an increase in product quality information to consumers on firms' choices of product quality. In 1998, Los Angeles County introduced hygiene quality grade cards to be displayed in restaurant windows. We show that the grade cards cause (i) restaurant health inspection scores to increase, (ii) consumer demand to become sensitive to changes in restaurants' hygiene quality, and (iii) the number of foodborne illness hospitalizations to decrease. These results imply the grade cards cause restaurants to make hygiene quality improvements. The regulatory change also provides an opportunity to separately analyze the effects of mandatory disclosure of grade cards and voluntary disclosure of grade cards, because in some cities the posting of grade cards is at restaurants' discretion. We find that the effects from voluntary disclosure are statistically different, but not economically different, from mandatory disclosure.

Keywords: disclosure regulation, information, product quality, unraveling, restaurants

JEL Classification: L15, L50, L81, K3, I18