There is a significant theoretical literature in economics that identifies various ways through which providing more information to consumers may lead to improvements in market effciency and consumer welfare in particular. The theoretical insights provide a basis for government policies that seek to increase the amount of information available to consumers. Examples of such policies include food labeling laws, accounting disclosure rules and energy effciency labels on home applicances. Meanwhile existing empirical studies into the effects of information to consumers on firm behavior find small or negligible effects, casting doubt on the importance of such policies. In this project, we analyze a regulatory change that provides an appealing context for evaluating the effects of increased product information on firms' product quality choices and disclosure decisions. In 1998, Los Angeles County introduced hygiene quality grade cards to be displayed in restaurant windows. The regulatory change provides an experiment in whether firms are subject to volun- tary disclosure (of hygiene quality) without verifiability, voluntary disclosure with verifiability or mandatory disclosure. Our research indicates substantial effects of the increased information on restaurant hygiene quality. We also find that the effects from mandatory disclosure are very similar to the effects from voluntary verifiable disclosure. A possible implication of this finding is 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 for firms to voluntarily disclose verifiable product information. The richness of our dataset allows us to also analyze how the effects of the grade cards differ across restaurants. This is interesting because we can address questions that have received little or no attention in the existing empirical literature, such as: (i) does reputation help firms to overcome adverse selection problems, (ii) do franchised chain-restaurants free-ride on chain reputation, and (iii) what is the effect of the increased product information on firms' profitability and market structure?
