Abstract
How can consumers be assured that firms will endeavor to provide good quality when quality is unobservable prior to purchase? We test the hypothesis that reputational incentives are effective at causing restaurants to maintain good hygiene quality. We find that chain affiliation provides reputational incentives and franchised units tend to free-ride on chain reputation. We also show that regional variation in the degree of repeat customers affects the strength of reputational incentives for good hygiene at both chain and nonchain restaurants. Despite these incentives, a policy intervention in the form of posted hygiene grade cards causes significant improvements in restaurant hygiene. (JEL I18, I19, L14, L83).
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