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

2. What Do I Mean by Food Safety? 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

3. Two Meanings of Differentiation Actual difference in food safety

4. A Case Study of Los Angeles Restaurants • Nov. 16-18, 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

6. Actual Differentiation

7. 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

8. 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

9. 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

10. How Could Information Differ Before GC? 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

11. Basic evidence - chain affiliation

12. Variation Across Chains

13. 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

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

15. 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

16. Region clustering before GC

17. Regional clustering after GC

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

19. 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%

20. 1.Why is National Restaurant Association against GC?2. Why don’t other counties adopt the same GC policy? Two Remaining Questions

21. 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)