Mandatory disclosure, letter-grade systems, and corruption: The case of Los Angeles County restaurant inspections

Abstract

During unannounced hygiene inspections, Los Angeles (LA) County restaurants receive numeric scores out of 100 points. In their windows, they must post letter grades revealing broad intervals to which their scores belong. Relative to numeric-score disclosure, this system creates strong incentives for score manipulation below letter-grade thresholds. Using LA County restaurant inspections spanning 2014–2016, I test for manipulation by exploiting a feature of the county’s scoring criteria. While most health code violations carry a single prescribed 1, 2, or 4-point deduction; there are eleven violations where, depending on severity, 2 or 4 points may be deducted. Even when compared with inspections exhibiting better hygiene quality, restaurants on the margins of higher letter grades are 28–40% more likely to receive the lesser deduction on these violations, and the effect is significant across all eleven violation types. Score manipulation likely improved letter grades in 27% of inspections where deduction decisions had letter-grade implications. In regulated industries—beyond distorting producer incentives—seemingly minor disclosure-policy design features can unintentionally promote regulatory capture.