What Are the Financial Implications of Public Quality Disclosure? Evidence from New York City’s Restaurant Food Safety Grading Policy

Abstract

Grading schemes are an increasingly common method of quality disclosure for public services. Restaurant grading makes information about food safety practices more readily available and may reduce the prevalence of foodborne illnesses. However, it may also have meaningful financial repercussions. Using fine-grained administrative data that tracks food safety compliance and sales activity for the universe of graded restaurants in New York City and its bordering counties, we assess the aggregate financial effects from restaurant grading. Results indicate that the grading policy, after an initial period of adjustment, improves restaurants' food safety compliance and reduces fines. While the average effect on revenues for graded restaurants across the municipality is null, the graded restaurants located geographically closer to an ungraded regime experience slower growth in revenues. There is also evidence of revenue convergence across graded and ungraded restaurants in the long-term. JEL No. D12, H22, H27

What a Difference a Grade Makes: Evidence from New York City's Restaurant Grading Policy

“…At first glance, this suggests that the rise in mean sales taxes offsets declines in mean fine revenue. However, Meltzer et al () found little effect on overall restaurant sales, so caution is required here; if impacts of grades are zero‐sum then public grading may lead to a net decrease in total public revenues. Future work should focus on the long‐term effects of public restaurant grading in order to assess implications for total public revenues once high rates of compliance (A grades) are sustained for multiple years.…”

“…Finally, in a time of increasing competition for public resources, understanding the potential effects of these public health initiatives on municipal government revenues is critical and yet largely unexplored. Previous work by Meltzer et al () found little evidence of impacts (positive or negative) from the New York City grading policy on restaurant and bar sales. While sales increased, so did sales in similar establishments just outside the city.…”

“…While sales increased, so did sales in similar establishments just outside the city. Does that mean the effects reported by Meltzer et al () reflect gains by As and Bs and losses by Cs? Or, perhaps, do the null results reflect no changes for any restaurants?…”

“…10.Meltzer et al () found that increased inspection frequency drove the initial increase in fines, while fines per inspection fell dramatically every quarter of grading.…”

“…7.Meltzer et al () provide more conclusive evidence on the impact of the public grading policy on inspection scores.…”