Mandatory Disclosure, Letter-Grade Systems, and Corruption: The Case of Los Angeles County Restaurant Inspections

In 1998, Los Angeles (LA) County adopted a mandatory disclosure policy aimed at inducing restaurant hygiene improvements. LA County restaurants receive numeric scores during unannounced hygiene inspections and then post letter grades in their windows based on broad intervals to which their inspection scores belong. This letter-grade system generates: relatively weak incentives for hygiene improvement at letter-grade thresholds, and relatively strong incentives for score manipulation below those thresholds. Using over 140,000 LA County restaurant inspections spanning October 2014 to September 2016, I test for manipulation by exploiting a feature of the county's scoring criteria. The violation of most health codes carries a prescribed 1, 2, or 4-point deduction. However, there are eleven health code violations where, depending on severity, 2 or 4 points may be deducted. Even when compared with inspections exhibiting better overall hygiene quality, restaurants on the margin of a higher letter grade are 28-40% more likely to receive the lesser point deduction on these violations. Restaurants on the margin are significantly more likely to receive the lesser deduction across all eleven violation types. That, and other characteristics of the data, suggest that these results do not reflect restaurants electively bunching at letter-grade thresholds. I find that scores were manipulated to improve letter grades in as many as 5,921 inspections (4.2% of the sample, and 26.56% of inspections where scoring decisions had letter-grade implications).