1. Reputational Incentives for Restaurant Hygiene
Ginger Zhe Jin
University of Maryland
Phillip Leslie
Stanford University

2. How does reputation work?
Consumers do not know quality ex ante
Consumers learn and form beliefs (=reputation)
Consumer beliefs drive consumer choice in the next period
Reputation motivates sellers to provide high quality

3. Empirical studies of reputation
Demand
Borenstein & Zimmerman (1988)
Hubbard (2002)
Gompers and Lerner (1998)
Brickley, Coles and Linck (1999)
Price effect
Gorton (1996)
eBay reputation studies
We focus on supply-side effects
Does reputation cause firms to provide high quality?
No need to control for consumer prior belief
Borenstein and Zimmerman (1988) find a small negative effect of a plane crash on the airline
demand, suggesting weak reputational incentives. However, as the authors note, the strength
of reputational incentives depends on consumers prior beliefs. A mild response may imply
(i) consumers are unresponsive or (ii) consumers have a strong prior belief that includes
the expectation of an occasional crash.
Hubbard (2002) examines whether a low failure rate of a smog check firm attracts
more demand. He uses an individuals past experience at a particular firm as a proxy
for consumers prior beliefs. In the absence of a model of consumer learning, it is
unclear if this approach adequately controls for consumers prior belief.
Cross-sectional demand estimation is conducted in many other industries. For example:
Gompers and Lerner 1998:
better fund performance, more fundraising by venture organizations.
Brickley, Coles and Linck 1999:
the better a CEO performs, the better is the CEO’s prospect of serving
on the board of directors post retirement.
Gorton 1996:
in the free banking era of 1800s, lenders demand higher returns from banks without
established reputation.

4. Restaurant hygiene
January 16, 1998, LA county restaurant 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. Question
In Jin & Leslie (2003) we show that grade cards cause restaurants to improve hygiene
=> before grade cards there is a shortage of information to consumers
Before grade cards, about 25% of restaurants had A-grade hygiene
Why have good hygiene if consumers cannot really tell the difference?

7. Reputational incentives
Some restaurants are able to form reputations for good hygiene
Depends on underlying factors that affect consumer learning
chain affiliation
=> possible free-riding for franchisees
degree of repeat customers in local region
=> regional clustering in hygiene quality

8. Examples of repeated customers
Brickley & Dark 1987
restaurants close to free way exits have fewer repeated customers
may be a poor measure in LA county
Residential vs. tourist area
Snug Harbor: 93/ 92/ 90
Blue Rose Cafe: 59 / 82/ 72/ 74
Snug Harbor
diner in Santa Monica, on Wilshire,
that would have almost all repeat business
Blue Rose Cafe
diner-like place on Venice boardwalk
that would have many tourists

9. Alternative explanations
Regional differences in willingness-to-pay for hygiene quality
Exogenous restaurant heterogeneity
Manager preferences
Hygiene cost differences

10. Data and Identification
We observe more information than consumers do
All hygiene inspection outcomes in LA county from July 1995 to Dec => hygiene quality
Restaurant name, location, chain affiliation and owner identity => variations in consumer learning
Grade cards introduced in Jan 1998
Exogenous policy change
Grade cards eliminate informational differences across restaurants

11. Basic evidence - chain affiliation
A premise of our approach is that there are systematic differences in
hygiene quality across restaurants.
These differences occur in two dimensions:
chain affiliation
regional clustering

12. Basic evidence - regional clustering

13. Region clustering before GC

14. Regional clustering after GC

15. Santa Monica before GC
Upper 1/3
Lower 1/3

16. Regressions for chain affiliation:
Before GC only: (kitchen sink)
Before and after GC:

17. Kitchen sink regression before GC

18. Chain locations in Santa Monica

19. Full sample with restaurant FE

20. Due to cost differences?

21. Our solution is the mean score after grade cards
Assume that two restaurants in the same city with same post-GC score, have the same hygiene cost function
See if the difference in their pre-GC score is related to chain affiliation

22. Regress sB on sA

23. Test of regional clustering
Before GC:
After GC:
Regional effects before GC:
Regional effects after GC:

24. Test 1: Absolute differences in regional effects
Assuming α3=0 implies
If rj=r, then
We reject equality with 99% confidence

25. Test 2: relative differences in regional effects
Allowing for α3 ~=0
If rj=r, then
Estimate with and without restriction:
We reject rj=r with 99% confidence

26. Extensions
The chain effect may be smaller in regions with a high degree of consumer learning
pass absolute differences test for chains
fail relative differences test for chains
absolute regional effects change less for chains than for non-chains
Franchisee free-riding may be smaller in regions with a high degree of consumer learning
Tests fail to support this hypothesis

27. Conclusion
We analyze reputational incentives by testing supply-side implications
The results indicate
Chain affiliation is an effective source of reputational incentives
A small degree of franchisee free-riding
Regional differences in the degree of consumer learning impact hygiene quality for independent restaurants
Large impact of grade cards suggests low degree of consumer learning for most restaurants