Ginger Zhe Jin, Director, FTC Bureau of Economics: Information Asymmetries, Disclosure, and Economic Outcomes

the antitrust source Ⅵ www.antitrustsource.com Ⅵ April 2 01 6 1

Fei Deng and Qian Lu

Professor Ginger Zhe Jin started her new role as Director of Bureau of Economics at the FTC in January 2016, succeeding Francine Lafontaine. Professor Jin was born and received her earlier training in economics in China. She came to the U.S. for graduate study and earned her Ph.D. in economics from the University of California, Los Angeles in 2000. She then began her professional academic career at the University of Maryland, College Park (UMD), where she has been a Professor in the Department of Economics since 2012. In addition to fulfilling her teaching and student advisory responsibilities at UMD and serving Pas an editor for several economics journals, she has been actively involved in an initiative to build and publish a digitized nationwide database of food safety inspections of restaurants. She is a co- founder and chief data scientist of Hazel Analytics, a food safety inspection data gathering and analytics company, established in October 2014. The company is a direct outgrowth of research Professor Jin and co-authors have conducted in the area of food safety inspections. As an empirical Industrial Organization economist, Professor Jin’s research is characterized by compelling questions, large and original datasets, and effective application of econometric tech - niques. A recurring theme in her research is the effect of correcting information asymmetries among economic agents. A majority of her published papers study the effect that information dis - closure has on economic agents’ behavior and economic outcomes. This has direct application to the consumer protection activities of the FTC, which have the goal, among other things, of ensuring that companies provide consumers with accurate information. In the rest of the article we discuss her research broken down by industry. 1

Restaurant Hygiene Professor Jin has more than a decade of research experience studying the effects of the intro - duction of restaurant hygiene information disclosure policies. She and her co-authors collected original data on restaurant inspection records and food-born hospitalization rates, and used these data to study empirically a wide range of topics, such as how restaurants responded to the intro - duction of a mandatory or voluntary hygiene information disclosure policy; how the policy affect - ed consumer health in the short run and in the long run; and whether reputational incentives were Ⅵ Fei Deng is a Partner at effective in disciplining restaurants to maintain good hygiene quality. She and her co-authors’ Edgeworth Economics research in this area have significant policy implications, and have won several research grants and an Editor of from the National Science Foundation, Sloan Foundation, and Maryland Innovation Initiative. The Antitrust Source .

Qian Lu is a Principal at 1 We cover a majority, but not all, of Professor Jin’s research in this article. For a full list of her publications, please refer to her curriculum Edgeworth Economics. vitae at http://kuafu.umd.edu/~ginger/cv/jincv-02262016.pdf . the antitrust source Ⅵ www.antitrustsource.com Ⅵ April 2 01 6 2

In her earliest and most-cited paper, Jin and Leslie (2003), Professor Jin and her co-author studied the effect of the introduction of a mandatory policy in Los Angeles County in December 1997, requiring restaurants to post hygiene quality grade cards in their windows. 2 They found that this policy was very effective: in 1998, the year following the implementation of the policy, the pub - lic display of restaurant hygiene grade cards led to an increase in inspection scores, consumer switching from poor hygiene restaurants to good hygiene restaurants, and a 20 percent decline in food-borne hospitalizations. In a follow-up paper, Professor Jin and her co-authors extended the study by examining the long-run policy effect, and found that the public health benefit of the pol - icy was long lasting—the decrease in the number of foodborne-disease hospitalizations in Los Angeles County was sustained over the next two years (199 9–2000). 3 In addition to mandatory information disclosure, Professor Jin and her co-authors also looked at the effect of voluntary information disclosure in a recent study. 4 They studied how restaurants reacted after the adoption of a voluntary disclosure policy of restaurant hygiene using letter grade cards in Maricopa County, Arizona, in 201 1, and found that the voluntary disclosure policy led to a disclosure rate of 5 7.6 percent, and more surprisingly, “48% of non-disclosing restaurants would have posted an A grade if they had chosen to disclose. ”5 They further reasoned that this surpris - ing result might be explained by countersignaling—when information is coarse, restaurants with the best quality (A plus grade) may choose to use non-disclosure as a countersignal to distinguish themselves from eager-to-disclose medium-quality (A minus and B grades) restaurants, while medium-quality restaurants used disclosure to stand out from lower-quality restaurants. Another finding of Jin and Leslie (2003) is that 25 percent of restaurants in Los Angeles had very good hygiene even before the mandatory display of hygiene grade cards. This interesting fact indicates that there are market-based incentives that drive restaurants to maintain good hygiene even in the absence of the policy. In Jin and Leslie (2009), Professor Jin and her co-author tested the extent to which reputational incentives were effective at disciplining restaurants to maintain good hygiene quality. 6 They found that reputation was an effective discipline incentive— but only for a subset of restaurants, such as chain restaurants and restaurants located in areas with more repeat customers. This is because the amount of information disclosed by reputation and the degree of consumer learning from reputation varies substantially across restaurants. Thus, their findings highlight the importance and benefit of policy intervention in food safety, despite the existence of reputational incentives. Inspections require costly manual effort and the results may be subject to measurement error and bias. Professor Jin evaluated these issues by comparing the inspection results and restau - rant responses before and after an upgrade of the restaurant hygiene detection technology to portable digital assistants (PDAs) in Florida in November 2003. 7 Before the introduction of PDAs,

2 Ginger Zhe Jin & Phillip Leslie, The Effect of Information on Product Quality: Evidence from Restaurants Hygiene Grade Cards , 118 Q.J. ECON . 409 (2003). 3 Paul Simon, Phillip Leslie, Grace Run, Ginger Zhe Jin, Roshan Reporter, Arturo Aguirre & Jonathan E. Fielding, Impact of Restaurant Hygiene Grade Cards on Foodborne Disease Hospitalizations in Los Angeles County , 67 J. E NVTL . H EALTH 32 (2005). 4 Benjamin B. Bederson, Ginger Zhe Jin, Phillip Leslie, Alexander J. Quinn & Ben Zou, Incomplete Disclosure: Evidence of Signaling and Countersignaling (June 2015), http://kuafu.umd.edu/~ginger/research/BJLQZ-Maricopa-07092015-submitted.pdf . 5 Id. at 3.

6 Ginger Zhe Jin & Phillip Leslie, Reputational Incentives for Restaurant Hygiene , 1 AM. E CON . J.: M ICROECONOMICS 237 (2009). 7 Ginger Zhe Jin & Jungmin Lee, Inspection Technology, Detection and Compliance: Evidence from Florida Restaurant Inspections , 45 RAND J. E CON . 885 (2014). the antitrust source Ⅵ www.antitrustsource.com Ⅵ April 2 01 6 3

inspectors needed to manually mark 31 categories of critical violations and 24 non-critical viola - tions on a standardized form. With a PDA, inspectors could rely on a list of 1000 possible viola - tions with a detailed explanation of each violation, retrieve past reports, and upload the current inspection results immediately to a database. Professor Jin and her co-author found that the adoption of PDAs led to an 11 percent increase in detected violations at first, and a 5.4 percent decline in violations subsequently, suggesting that restaurants gradually increased their compli - ance efforts. They also found that the adoption of PDAs was associated with fewer restaurant-relat - ed food-borne disease outbreaks. As an extension to Professor Jin and her co-authors’ published research in the restaurant hygiene area, they took on a project of building and publishing a digitized nationwide database of food safety inspections of restaurants. This now-established database contains historical and In addition to restaurant current records of nationwide restaurant food safety inspection results and can be accessed by the public. 8 This project demonstrates Professor Jin’s first-hand experience dealing with issues food safety, Professor related to big data, such as standardization of public information, which provides useful back - ground for her in dealing with information issues at the FTC. Jin has also studied Prescription Drugs various aspects of In addition to restaurant food safety, Professor Jin has also studied various aspects of information asymmetry in the prescription drug market in terms of drug quality and factors that affect con - information asymmetry sumers’ choice of prescription drug. In a series of papers, Professor Jin and her co-authors used hand-collected data from devel - in the prescription drug oping countries and examined how drug quality is associated with price and other observable attributes of the drug, local regulation, and other characteristics, such as local consumer income market in terms of drug and educational level. Although these studies do not address the U.S. drug industry directly, U.S. consumers rely heavily on imported drugs —80 percent of the ingredients and 40 percent of final quality and factors that medications come from abroad, notably India and China. 9 Thus, a better understanding of the global prescription drug supply chain and the effects of regulatory quality control policies would affect consumers’ ultimately benefit U.S. consumers as well. In the first of this series of papers, Professor Jin and her co-authors constructed an original choice of prescription dataset containing a sample of 899 prescription drugs sold in 17 developing countries between 2008 and 2010, and tested drugs for accuracy of package information, the presence and relative drug. concentration of active ingredient, and drug formulation. 10 Their analysis shows that poor-quality drugs were priced 13. 6–18.7% lower than good-quality drugs of the same drug type. 11 In addition, they found that although consumers were likely to suspect low quality for drugs with a lower mar - ket price, a brand other than the innovator, and the look of the pharmacy, none of these signals could perfectly identify poor-quality drugs. Their results suggest that the information asymmetry between consumers and drug manufacturers cannot be totally solved by the signaling effect of

8 https://hazelanalytics.com/ . 9 See Deborah M. Autor, Dep. Comm’r for Global Regulatory Operations and Policy, Food and Drug Admin., U.S. Dep’t of Health and Human Services, Securing the Pharmaceutical Supply Chain, Statement Before the Committee on Health, Education, Labor and Pensions, U.S. Senate (Sept. 14, 2011), http://www.fda.gov/NewsEvents/Testimony/ucm271073.htm .

10 Roger Bate, Ginger Zhe Jin & Aparna Mathur, Does Price Reveal Poor-Quality Drugs? Evidence from 17 Countries , 30 J. H EALTH ECON .1150 (20 11 ). 11 Fifteen percent of the sample failed in at least one test and were classified as “poor-quality” drugs. The rest of the sample that passed all tests were classified as “good-quality” drugs. Id. at 1155. the antitrust source Ⅵ www.antitrustsource.com Ⅵ April 2 01 6 4

price and other observable characteristics of the drug, leaving room for post-market inspection of drug quality and education of consumers on identifying drug quality as means to maintain drug quality in developing countries. In a follow-up study, Professor Jin and her co-authors further categorized poor-quality drugs as either “falsified” (a drug contains zero correct active ingredient) or “substandard” (a drug contains a nonzero but incorrect amount of the active ingredient) and explored how price and non-price signals can help distinguish between falsified, substandard, and good-quality drugs. 12 They found that while substandard drugs are on average cheaper than good-quality generics in the same city, A recent work by and thus can be identified based on the price, falsified drugs are more likely to mimic good-qual - ity generic versions of the drugs in terms of both price and packaging, thus making it difficult for Professor Jin expands consumers to identify them ex ante. Similar to the results in Professor Jin’s earlier paper, this find - ing suggests the importance of regulatory oversight when the signaling effect of price and other her study of characteristics cannot fully solve information asymmetries. A recent work by Professor Jin expands her study of prescription drugs to online drug markets. prescription drugs to While online purchase of prescription drugs may attract consumers due to convenience and pos - sible cost savings, it also raises quality and safety concerns due to information asymmetry. In online drug markets. Bate, Jin, and Mathur ( 2013), Professor Jin and her co-authors examined why consumers chose to shop for prescription drugs online and the role of public and private certification agencies in While online purchase delivering quality information. 13 They found that the certification agencies, although some are not endorsed by the FDA, play an active role in both the demand and the supply of online drugs. On of prescription drugs the demand side, the certification agencies provide U.S. consumers with useful quality informa - tion about different websites. On the supply side, the authors found no failure of authenticity with - may attract consumers in the samples that they tested, as long as the drugs were from certified websites, whether FDA- endorsed or not. due to convenience and Another focus of Professor Jin’s research on prescription drugs is the role of information in drug diffusion, including how direct-to-consumer advertising of prescription drugs affects the behav - possible cost savings, ior of doctors and patients and how patient satisfaction affects diffusion of prescription drugs. In Iizuka and Jin (2005), Professor Jin and her co-author studied how an increase in direct-to-con - it also raises quality sumer advertising (DTCA), driven by a policy change regarding the advertising content require - ment, affected doctor visits. 14 Their findings suggest a market expansion effect—higher DTCA and safety concerns expenditures were associated with increased doctor visits, presumably due to the fact that ads inform consumers of new treatment options. Iizuka and Jin (2007) extended this study by looking due to information at whether DTCA affects physician prescription choice once the patient visits a doctor, and found that DTCA has little effect on the choice of prescription drug, while detailed advertising to physi - asymmetry. cians has a much larger and longer-lasting effect. 15 All together, these two papers show that DTCA expands the market for prescription drugs but does not distort prescription drug choice once the patient arrives at the physician’s office. This finding provides important policy implications in support of the use of DTCA. Chintagunta, Jiang,

12 Roger Bate, Ginger Zhe Jin & Aparna Mathur, Falsified or Substandard? Assessing Price and Non-price Signals of Drug Quality , 24 J. E CON . & M GMT . S TRATEGY 687 (2015). 13 Roger Bate, Ginger Zhe Jin & Aparna Mathur, In Whom We Trust: The Role of Certification Agencies in Online Drug Markets , 14 B.E. J. ECON . A NALYSIS & P OL ’Y 111 (2013).

14 Toshiaki Iizuka & Ginger Zhe Jin, The Effect of Prescription Drug Advertising on Doctor Visits , 14 J. E CON . & M GMT . S TRATEGY 701 (2005).

15 Toshiaki Iizuka & Ginger Zhe Jin, Direct-to-Consumer Advertising and Prescription Choice , 55 J. I NDUS . E CON . 771 (2007). the antitrust source Ⅵ www.antitrustsource.com Ⅵ April 2 01 6 5

and Jin (2009) further explores the diffusion of prescription drugs by studying whether it depends solely on advertising and updates from the Food and Drug Administration (FDA) or if the market can also learn the efficacy of new drugs through physician learning. 16 They found that prescrip - tion choice is sensitive to many sources of information, including physician’s learning from patient satisfaction, academic articles, news articles, and FDA updates, but these channels do not nec - essarily substitute for each other since they may reflect different dimensions of drug quality.

Health Care Professor Jin has also conducted research in the health care area, studying use of voluntary qual - ity disclosure by health maintenance organizations (HMOs) as a form of differentiation, the effect of contribution scheme design (e.g., employer premium contribution) on health care plan pricing, and the effect of disclosed health plan ratings on individuals’ plan enrollment decisions. In Jin (2005), she investigated why only half of health maintenance organizations (HMOs) chose to disclose quality information under a voluntarily disclosure policy, and more specifically, how competition affected their disclosure incentives. 17 She found that HMOs used voluntary dis - closure decisions to differentiate themselves from their competitors and that competition provid - ed incentives for differentiation. When ratings for HMOs were first introduced, the earliest disclo - sures appeared in the most competitive markets because good-quality HMOs in these markets had the strongest incentives to differentiate themselves from non-disclosing lower-quality HMOs in the same area. However, as the number of competitors increased, HMOs in highly competitive markets had stronger incentives to use non-disclosure as counter-signaling, presumably due to limited degree of differentiation among disclosed qualities. Thus, areas with more HMOs ended up having a smaller proportion of disclosing HMOs. Interestingly, her finding here is consistent with her findings in the area of restaurant hygiene voluntary disclosure policies. 18 Professor Jin has also looked at how health plan ratings affect individuals’ plan enrollment deci - sions, and found that higher publicized ratings increased enrollment, especially for individuals who chose a plan for the first time. 19 More recently, Professor Jin and her co-author analyzed how the design of the employer premium contribution scheme can affect health plan pricing by study - ing the effect of a premium subsidy policy change in the Federal Employees Health Benefits Program (FEHBP). 20 Their findings suggest that an increase in employer premium contribution per - centage leads to a higher health insurance premium, partly because consumers are less price sensitive when only a part of the premium increase falls on them, partly because it creates an incentive for health plans to strategically set the premium in order to obtain more premium con - tribution from the employer.

E-Commerce Issues related to information sharing faced by e-commerce firms are similar to the issues faced by firms in traditional markets, but with some distinct characteristics. For online platforms, the issue of information asymmetry is exacerbated by the fact that the sellers and/or buyers are often

16 Pradeep K. Chintagunta, Renna Jiang & Ginger Zhe Jin, Information, Learning, and Drug Diffusion: The Case of Cox-2 Inhibitors , 7 QUANTITATIVE MKTG . & E CON . 399 (2009).

17 Ginger Zhe Jin, Competition and Disclosure Incentives: Empirical Evidence from HMOs , 36 RAND J. E CON . 93 (2005). 18 Bederson et al. (2015), supra note 4.

19 Ginger Zhe Jin & Alan Sorensen, Information and Consumer Choice: The Value of Publicized Health Plan Ratings , 25 J. H EALTH ECON . 248 (2006).

20 Yiyan Liu & Ginger Zhe Jin, Employer Contribution and Premium Growth in Health Insurance , 39 J. H EALTH ECON . 228 (2015). the antitrust source Ⅵ www.antitrustsource.com Ⅵ April 2 01 6 6

anonymous, which can make adverse selection problems more likely. On the other hand, the Internet also enables each individual to have access to a large amount of information when mak - ing a decision. However, the abundance of information could also be a double-edged sword: it might be time-consuming and difficult for a consumer to process all the information. Therefore, how to aggregate, interpret, and present the information has strategic importance for online plat - forms. One type of online platform Professor Jin studied is peer-to-peer (P2P) lending. In a P2P mar - ket, both lenders and borrowers are anonymous, and only part of borrower’s credit history is dis - closed to lenders. Therefore, there might be adverse selection on the borrowers’ side—those who choose to borrow through P2P may do so because their credit history is sufficiently poor that they cannot get a loan in traditional lending markets. In Freedman and Jin ( 201 1), Professor Jin and her co-author studied how sellers overcome the information asymmetries about borrower risks using market-level information. 21 Using daily trans - actional data on lenders’ portfolios and the loan payment history of a leading P2P lending web - site, Prosper.com, they found that lenders, especially those that joined Prosper.com early, under - estimated borrower risk and suffered accordingly in the beginning. Over time, lenders learned to reduce the risk from their own mistakes, as well as from the portfolio performance of other lenders in the market. Because of this learning by doing process, the P2P market over time excluded risky borrowers and converged towards the traditional lending market. In a later study, Freedman and Jin ( 2015), Professor Jin and her co-author further examined the value of information disclosed from social network features instituted by Prosper.com. 22 The social networks on Prosper.com are in the form of friend connections and group memberships, mainly functioning via informal borrower credit endorsement and lending activity updates. The authors found that although network affiliated loans were more likely to get funded and get lower interest rates, only social ties involving friends who also contributed to the loan produced better ex post performance. Another online platform that Professor Jin studied is sports card trading. In Kato and Jin (2006), Professor Jin and her co-author analyzed if the ratings and quality claims of sellers can be used to infer product quality in online baseball card trading. 23 They designed a field experiment to obtain the “true product quality,” where they bid on and purchased ungraded cards from auctions on eBay.com weekly during December 8, 20 01 and March 18, 2002 from sellers with different claimed product qualities, and then had the cards professionally graded. Combined with addi - tional data obtained from eBay.com from April to December 20 01 on features, such as final price, number of bids, shipping cost, length of auction, seller ratings, and card grades, they found that buyers paid more for cards with high seller-claimed quality, but that higher seller-claimed quality was more likely to be associated with lower actual card quality and even fraud. Additionally, they found that reputable sellers suggested by online seller ratings were less likely to make high self- claims and less likely to engage in fraud, and buyers were more willing to bid on items and pur - chase from reputable sellers. Moreover, conditional on the auction being completed, seller repu - tation had no significant impact on winning prices.

21 Seth Freedman & Ginger Zhe Jin, Learning by Doing with Asymmetric Information: Evidence from Prosper.com (NBER Working Paper, No. 16855, 20 11 ). 22 Seth Freedman & Ginger Zhe Jin, The Information Value of Online Social Networks: Lessons from Peer-to-Peer Lending (NBER Working Paper, No. 19820, 2015).

23 Andrew Kato & Ginger Zhe Jin, Price, Quality and Reputation: Evidence from an Online Field Experiment , 37 RAND J. E CON . 983 (2006). the antitrust source Ⅵ www.antitrustsource.com Ⅵ April 2 01 6 7

In another working paper, Professor Jin and her co-authors looked at how buyer protection mechanisms could affect buyers, sellers, and market outcomes for Eachnet.com, an eBay-equiv - alent Chinese online trading website. 24 They found that, early on, the adoption of a money-back buyer protection mechanism had a negative effect on seller ratings and the number of sellers and listings. The rationale behind this result is that, all else equal, buyer protection increases buyers’ willingness to buy and the expected profit of sellers, and this then disproportionally motivates A review of Professor strategic sellers (in contrast to honest sellers) to enter and cheat. The authors suggest that in order for a trust-enhancing mechanism to work, it needs to not only protect buyers, but also to penal - Jin’s academic work ize cheating sellers. With the enormous amount of information online, how to aggregate and interpret information is shows that she has a key question faced by many online platforms. In a recent working paper, Professor Jin and her co-authors proposed an alternative “optimal” method of averaging consumer reviews with weights extensive empirical accounting for reviewer biases, reviewer heterogeneity, and the changing quality of restaurants over time, rather than the simple arithmetic average used by websites like Yelp.com. 25 They found research experience that the results from their proposed methodology can differ significantly from that of the simple average: for 19 to 41 percent of restaurants in their sample, there was a difference of more than in many industries, 0.15 stars and for 5 to 19 percent of restaurants there was a difference of 0.25 stars. They explained that most of the difference is driven by the evolution in a restaurant’s quality over time— focusing on the effect of the simple average weights a restaurant’s first review the same as it weights the thousandth review. In contrast, their algorithm reduces the weight assigned to early reviews and hence more information disclosure quickly adapts to changes in quality. It is worth noting that although their algorithm is derived from Yelp reviews, it could be applied to virtually any website that relies on consumer ratings to con - on economic agents’ vey information about product or service quality. It is also interesting to note that although the opti - mal methodology is arguably better in terms of accounting for the evolution of restaurant quality behavior and economic and reviewer preferences and heterogeneity, most review websites, such as Yelp, Amazon, and TripAdvisor, currently are still using the simple arithmetic average. One possible reason, as the outcomes. authors noted, might be that arithmetic averages are transparent and uncontroversial, and are thus at lower risk of antitrust or unfair competition allegations. The paradox is that the risk mini - mizing methodology may not generate an outcome that produces the best information for con - sumers, contrary to the ultimate goal of antitrust and consumer protection.

Conclusion A review of Professor Jin’s academic work shows that she has extensive empirical research expe - rience in many industries, focusing on the effect of information disclosure on economic agents’ behavior and economic outcomes. Most of her research has involved collecting and building inno - vative and original datasets and cleverly exploiting natural experiments to answer complex and puzzling questions. Her deep involvement with the construction and publication of digitalized nationwide database of restaurant hygiene inspections gives her an insider’s perspective on issues surrounding big data, her rich research experience studying policy effects in health care, prescription drug, e-commerce, and other industries prepares her well for her new role at the FTC .ⅷ

24 Hongbin Cai, Ginger Zhe Jin, Chong Liu & Li-An Zhou, More Trusting, Less Trust? An Investigation of Early E-Commerce in China (Working Paper, July 2014), https://www.aeaweb.org/aea/2016conference/program/retrieve.php?pdfid=779 . 25 Weijia Dai, Ginger Zhe Jin, Jungmin Lee & Michael Luca, Optimal Aggregation of Consumer Ratings: An Application to Yelp.com (Working Paper, Oct. 2014), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2518998 .