Thesis advisor: Julie Mortimer / This dissertation estimates the impacts of a mandatory disclosure policy (the New York City grade law) on hygiene quality choices, prices, and competition.In the first and third chapters of my dissertation, I estimate a dynamic structural model to recover the implied costs underlying quality choice decisions. Though the researcher may not observe these costs in the data, they can be recovered empirically by considering how firm decision making changes depending on the conditions in play at the firm and in the market over time. Having a structural model also enables me to conduct counterfactual experiments, which show that several key parameters, such as sunk entry costs, or the value from competing in certain types of markets, can have a meaningful impact on the policy outcomes. My first chapter examines whether the grade law leads to increased product quality provision by firms selling differentiated products. I focus on Zagat rated restaurants, which prior to the grade law have many pre-existing quality characteristics valued by consumers that can differentiate them from other firms. I estimate a dynamic model of entry, exit and investment in hygiene quality, incorporating permanent firm-level unobserved heterogeneity, and find that the grade law increased payoffs from entering with, operating with, and investing in higher quality. However, I also show that underlying costs of providing quality affect firm decision making in the absence of mandatory disclosure, and that altering these costs can shift the distribution of quality types towards higher quality. I derive a counterfactual tax policy that directly targets these costs and leads to higher percentages of high quality firms across markets than the mandatory disclosure policy. My second chapter uses the same panel of Zagat restaurants as in Chapter 1, and estimates how the grade law affects the pricing decisions of restaurants with different hygiene qualities. Since the grade law introduces a new dimension of product quality, firms may be able to charge higher prices for access to high quality. However, because firms in this setting are already selling differentiated products, it is possible that prices do not change. Furthermore, prices charged by lower quality firms may fall, because consumers would not consume at a low quality firms without being compensated with a lower price, or the prices may not change or even rise, partially because consumers are still willing to pay for the firm's other quality characteristics. Controlling for firm characteristics and market conditions, I find that the introduction of the law led to a decrease in prices charged by lower quality firms relative to those charged by high quality firms. The results suggest that as quality levels increase in the market, consumers may benefit due to the decreased ability of firms to price discriminate as they would if there were asymmetric information on quality. However, I also find evidence that, as a result of the grade law, firms pass-through some of the costs of improving quality to consumers in the form of higher prices. My third chapter presents preliminary findings suggesting how the grade law impacts the hygiene quality choices of firms with few observable quality characteristics prior to mandatory disclosure. Using the same dynamic model framework as in Chapter 1, I estimate the effects of the grade law on the hygiene quality choices of bagel shops, and show how these choices relate to market competition. While most of the model results and predictions from this chapter are sensitive and should be interpreted with caution as they likely do not fully identify the parameters of interest, I do estimate a positive relationship between competition with high quality firms and choice of high quality after the grade law; however, I also find evidence that entry costs are increasing in quality. Counterfactuals show that lowering the costs of entry with high quality both before and after the grade law could increase the proportion of firms choosing high quality. Additionally, I find that the competitive interaction between firms provides an important incentive to investing in higher quality under mandatory disclosure. I interpret this finding as evidence that the effects of mandatory disclosure are primarily transmitted through competition, and that removing these effects of competition would significantly reduce the gains from mandatory disclosure. This research contributes to a growing literature on the efficacy and importance of mandatory disclosure policies. Mandatory disclosure can be a valuable policy tool used to target an inefficiency or social harm such as a high incidence of food poisoning at restaurants. However, the effect of these policies on the choices made by firms should also be considered. Firm quality choices after mandatory disclosure will be determined by consumer demand for the new dimension of product quality, competition with market rivals, and costs. Consumer demand for hygiene quality may depend on factors such as how much they pay for a meal, meaning that demand for hygiene quality may be different for limited-service restaurants than for full-service restaurants. However, allowing consumers, who may consider multiple characteristics of quality, not just hygiene, to provide the sole incentives for firms to improve their quality, may under-incentivize quality improvement of some firms. Furthermore, market conditions such as competition can be important, and may not be addressed at all by the consumer response. Policies that use cost-based incentives to firms, or target firms operating under certain market conditions, could be used as a replacement or supplement to the workings on the demand-side. My results suggest that such alternative policies which, rather than asking consumers to enforce product quality improvement via their consumption decisions, directly target the incentives faced by firms when making product quality choices, merit consideration. / Thesis (PhD) — Boston College, 2016. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.
| Identifer | oai:union.ndltd.org:BOSTON/oai:dlib.bc.edu:bc-ir_107168 |
| Date | January 2016 |
| Creators | Smith, Michael J. |
| Publisher | Boston College |
| Source Sets | Boston College |
| Language | English |
| Detected Language | English |
| Type | Text, thesis |
| Format | electronic, application/pdf |
| Rights | Copyright is held by the author, with all rights reserved, unless otherwise noted. |
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