Differentiation in Food Safety

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Differentiation inFood Safety

• Ginger Z. Jin
• University of Maryland
• (based on joint work with
• Phillip Leslie at Stanford)

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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

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Two Meanings of Differentiation
Actual difference in food safety
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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

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(No Transcript)
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Actual Differentiation
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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

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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

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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

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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

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Basic evidence - chain affiliation
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Variation Across Chains
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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

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

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Region clustering before GC
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Regional clustering after GC
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Statistically ...

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

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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

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1. Why is National Restaurant Association against
GC?2. Why dont other counties adopt the same
GC policy?
Two Remaining Questions
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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)