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Comment on “Fudging the Nudge”

Daniel Ho (http://www.law.stanford.edu/node/166494) recently posted a new paper on information disclosure and restaurant grading: Fudging the Nudge: Information Disclosure and Restaurant Grading, http://yalelawjournal.org/the-yale-law-journal/article/fudging-the-nudge:-information-disclosure-and-restaurant-grading/ .

Here’s the abstract: “One of the most promising regulatory currents consists of “targeted” disclosure: mandating simplified information disclosure at the time of decisionmaking to “nudge” parties along. Its poster child is restaurant sanitation grading. In principle, a simple posted letter grade (‘A,’ ‘B,’ or ‘C’) empowers consumers and properly incentivizes restaurateurs to reduce risks for foodborne illness. Yet empirical evidence of the efficacy of restaurant grading is sparse. This Article fills the void by studying over 700,000 health inspections of restaurants across ten jurisdictions, focusing on San Diego and New York. Despite grading’s great promise, we show that the regulatory design, implementation, and practice suffer from serious flaws: jurisdictions fudge more than nudge. In San Diego, grade inflation reigns. Nearly all restaurants receive ‘A’s. In New York, inspections exhibit little substantive consistency. A good score does not meaningfully predict cleanliness down the road. Unsurprisingly, New York’s implementation of letter grading in 2010 has not discernably reduced manifestations of foodborne illness. Perhaps worse, the system perversely shifts inspection resources away from higher health hazards to resolve grade disputes. These results have considerable implications, not only for food safety, but also for the institutional design of information disclosure.”

It’s really a super paper and worth reading for anyone interested in the policy of disclosure. I’d like to make a few comment, though. Certainly Daniel is a meticulous empiricist, and so if his results are true, what are the implications? At a minimum, it suggests that disclosure of restaurant health ratings is ineffective unless the implementation and design of the practice is carried out, and that we (as researchers) should be cautious when touting disclosure as a solution.

This shouldn’t really be surprising, though. Is it also suggesting that disclosure, as a policy intervention, is ineffective? No, certainly not. The paper merely addresses one case, and I don’t think anyone would disagree that in order to be effective, policies must be implemented and enforced appropriately.

For instance, data breach disclosure laws suffer from the same problem — if consumers are harmed when firms lose their personal information, then notifying them about the breaches should empower them to take action and avoid any loss.  But what is it that firms *should* say? What meaningful action can consumers take? This part isn’t clear. Yes, one can be more diligent by checking or closing financial accounts, etc. But a critical property of confidential information is that once it’s lost, there’s no way to recover from it. Credit card numbers and passwords can be changed, but once an employer or insurance company knows about your medical history, there’s no way to “unknow” it.

I am a big fan of information disclosure as a policy intervention. I’m also a big fan of recognizing the circumstances under which disclosure would or would not be effective — and where other kinds of interventions (ex ante/ex post) can also help reduce any externalities. I think Daniel’s paper helps inform the challenges of disclosure.




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