This dissertation consists of two chapters. In the first chapter, which is co-authored with Marcus Studart, we study the interaction of information and competition in incentivizing firms to produce high quality. We estimate a discrete quality choice game, using restaurant hygiene inspection data in Los Angeles County, from 1995 through 1998. Our results show that information is sufficient for competition to have an effect on quality provision. We also find that after the mandatory disclosure of information to consumers, a restaurant's equilibrium quality increases in the number of competitors up to a certain threshold. Beyond this threshold, an additional firm has a negative effect on quality choice. This result may indicate that too much competition reduces the returns of quality provision, which we interpret as a result of firms having more difficulty retaining customers.
In the second chapter, I investigate the notion of "hype" in the U.S. motion picture industry, which occurs whenever an upcoming film is heavily advertised irrespective of its underlying quality. I address the questions of 1) whether hype is a measurable phenomenon in data from the movie industry, 2) why the practice of hype is feasible, and 3) how the feasibility of hype impacts the movie industry. I first search for evidence of hype using a data set of weekly advertising expenditures, box office revenues, critical review outcomes, and movie characteristics of wide release theatrical films from 2003 to 2012. Using critical review outcomes as a measure of underlying quality, I observe that advertising levels are similar across film quality levels. I find that advertising levels fall dramatically between the pre-release and post-release phases for all movies, but they decay much more sharply for low quality films.
Building on this finding, I exploit weekly variation in the data by using regression analysis and a matching difference-in-differences estimator to quantify the causal effect of release and high critical reviews on advertising behavior. I find that advertising prior to a film's release is not statistically related to underlying film quality, but distributors with movies revealed to be high quality spend 62% more on advertising after release than other films. I then build a theoretical model of advertising on the movie industry based on Butters (1977) which incorporates consumer verification of film quality as a key feature to support this result. I provide conditions that ensure the existence and uniqueness of an advertising equilibrium in the model. I compute numerical examples of advertising equilibria and show that under certain parameter values, the distributors of bad films have no incentivize to advertise if consumers are sufficiently informed of quality. These findings suggest that consumer access to critical reviews could explain the feasibility of hype in the movie industry.