Collaborative Research: The Effects of Information on Firm Conduct and Market Structure

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There is a significant theoretical literature in economics that identifies various ways throughwhich providing more information to consumers may lead to improvements in market effciencyand consumer welfare in particular. The theoretical insights provide a basis for governmentpolicies that seek to increase the amount of information available to consumers. Examples ofsuch policies include food labeling laws, accounting disclosure rules and energy effciency labelson home applicances. Meanwhile existing empirical studies into the effects of information toconsumers on firm behavior find small or negligible effects, casting doubt on the importance ofsuch policies. In this project, we analyze a regulatory change that provides an appealing contextfor evaluating the effects of increased product information on firms' product quality choices anddisclosure decisions.In 1998, Los Angeles County introduced hygiene quality grade cards to be displayed in restaurantwindows. The regulatory change provides an experiment in whether firms are subject to volun-tary disclosure (of hygiene quality) without verifiability, voluntary disclosure with verifiabilityor mandatory disclosure. Our research indicates substantial effects of the increased informationon restaurant hygiene quality. We also find that the effects from mandatory disclosure are verysimilar to the effects from voluntary verifiable disclosure. A possible implication of this findingis that mandatory disclosure laws (which could be hard to introduce due to lobbying by indus-try groups) are less important than having the government provide mechanisms/procedures forfirms to voluntarily disclose verifiable product information.The richness of our dataset allows us to also analyze how the effects of the grade cards differacross restaurants. This is interesting because we can address questions that have receivedlittle or no attention in the existing empirical literature, such as: (i) does reputation help firmsto overcome adverse selection problems, (ii) do franchised chain-restaurants free-ride on chainreputation, and (iii) what is the effect of the increased product information on firms' profitabilityand market structure?