What do consumers learn from regulator ratings? Evidence from restaurant hygiene quality disclosures

Abstract

Abstract Regulators use ratings to inform consumers about firms and products across a range of industries, but little is known about what consumers learn from such ratings. We propose and directly study two pathways through which consumers form beliefs about products and firms based on these ratings: inference about the absolute implications of a rating (e.g., does a good rating mean a firm is of high quality?) and inference about the relative implications of a rating (e.g., do few firms have a rating this good?). In the context of restaurant hygiene ratings, we find that consumers form incorrect beliefs along both pathways and that their mis-calibrated beliefs are strongly related to their willingness to pay for a restaurant meal. We also find that their misperceptions can be partially reduced with informational interventions that impact their willingness to pay as well.