Effective Consumer Disclosures

by Jeff Sovern

I (and plenty of others) have written in the past about consumer disclosures that haven't worked.  But what about consumer disclosures that do work?  As residents of Los Angeles know, that city began grading restaurant hygiene about a decade ago (New York City adopted a similar system recently).  Restaurants are required to post their grade--typically an A, B, or C--at the entrance.  That simple disclosure seems to have made a huge difference.  My research assistant, Ourania Sdogos, recently dug up some studies evaluating the LA system (you can find them here, here, and here).  The result: Not only does it appear that some consumer use the grades to seek out cleaner restaurants, but restaurants striving for higher grades also improve their hygiene.  Hospitalizations caused by food-borne illnesses also declined.

It appears, then, that many consumers do pay attention to disclosures consisting of a single letter.  It also seems that such a disclosure system inspires businesses to make changes so that they receive a better grade.  In other words, one way to get businesses to change their behavior is to give them a grade for the behavior and post it prominently at the business's entrance.  In addition, it seems that even consumers who might not pay attention to the grade have benefited from the grading system, because restaurants competing for the dollars of those who do pay attention make improvements that benefit all.  This last result is, of course, predicted by Alan Schwartz & Louis L. Wilde's famous--but much criticized-- article, Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests, 69 VA. L. REV. 1387 (1983).

Not that this is a surprise, but If you want effective consumer disclosures, a single letter is a good way to go.  

 

Comments

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To be effective, disclosures must give consumers information about credit pricing at a time when it is relevant, and in language consumers can easily understand.

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