In 1998, Los Angeles adopted a law requiring restaurants to publicly post hygiene inspection letter grades.  These grades rated the restaurants’ performance on their hygiene inspections and mandated that the establishment post the grade in a conspicuous location. Evaluations of the policy find that grade posting reduces food borne illnesses in Los Angeles (Jin and Leslie, 2003; and Simon et al., 2005).  Since that time, other cities have adopted similar policies in an effort to improve the hygiene of restaurants and reduce the number of food borne illnesses.  In addition to affecting restaurant hygiene, these policies may affect the distribution of food sale revenues across restaurants and the opening and closing of restaurants. Jin and Leslie estimate the impact of restaurant inspection grades on restaurant revenues by exploiting the rollout period of graded inspections in Los Angeles. No one to date, however, has assessed the economic impacts of restaurant inspection grading systems outside of Los Angeles nor used regression discontinuity and difference-in-difference strategies to estimate the differential effect of each grade on restaurant revenue.  This study provides new evidence of the economic consequences of health inspection grades on restaurants.

Without publicly available inspection scores, restaurants know more about their respective hygiene than do consumers. Even with publicly available inspection scores, if access to hygiene information takes significant time or effort to track-down and understand, the transactions costs of learning about restaurant hygiene may not enable consumers to make informed decisions. As such, restaurants have little incentive to invest in higher hygiene quality due to information asymmetry.  A key assumption of restaurant grading laws is that by solving the information asymmetry problem consumers will use the posted information in making informed decisions about where to eat. Publicly posted inspection grades are hypothesized to increase the demand for restaurants with good hygiene and decrease the demand for restaurants with poor hygiene.  As a result, the relative prices and number of customers in restaurants with good hygiene are hypothesized to increase, while the opposite is hypothesized for restaurants with poor hygiene.  

To test these hypotheses we use detailed, longitudinal data from a large U.S. city that has introduced publicly posted health inspection grades.  These data include information on the content of inspections, health inspection grades, food sales, and the opening and closing of all restaurants subject to the health grades policy.  We use difference-in-difference and regression discontinuity strategies in order to estimate the economic impacts of these policies across restaurants, located in different neighborhoods. Findings will shed light on the impact of public health grades on restaurant viability and the municipal fisc overall.