I've been thinking about this for some time. If you are at a restaurant, and you spy a bunch of award certificates on the wall, should this give you confidence that this is a good restaurant? Many people would say 'yes, of course'. It is an award-winning restaurant, so of course it is a good restaurant. I'm not so sure, and in fact I think that in many cases a bunch of restaurant awards on the wall might be a negative signal, or no indicator at all. Let me explain why.
First, let's consider why restaurants need to signal at all. Restaurant quality is what economists call private information. The restaurant operators know whether their restaurant is high quality or not, but the patrons do not know (at least, not until they have eaten there). Restaurant meals are an experience good - the quality of the restaurant (an experience characteristic) is only known to the patron after they have experienced the restaurant meal. This information asymmetry between the restaurant operators and restaurant patrons creates an adverse selection problem. If high-quality restaurants can't distinguish themselves from low-quality restaurants, then the restaurant patron will assume that every restaurant is a low-quality restaurant (this is a pooling equilibrium). If this was to happen, then high-quality restaurants would probably start to close down (because they won't be able to get enough additional patrons to pay for their higher costs), and we'd be left with only low-quality restaurants left.
Of course, that scenario doesn't play out in most cities. Restaurants have found ways to make their quality known to patrons. When the informed party (the party that doesn't know the private information) tries to credibly reveal the private information, this is what economists call signalling. [*] In order for a signal to be effective, it needs to meet two conditions. First, it must be costly. And second, it must be costly in such a way that the low-quality restaurants wouldn't want to attempt the signal.
Now, let's consider the signalling value of award certificates. Is an award certificate costly? Yes, getting an award certificate is costly for a restaurant. The restaurant operators would have to work hard on quality of food and ingredients, and the quality of service, in order to win a certificate. [**] Is an award certificate costly in such a way that the low-quality restaurants wouldn't want to attempt the signal? A low-quality restaurant is low quality because of poorer quality food and service (and whatever other criteria are considered in the awarding of the certificate). If the low-quality restaurant operators were willing to pay the costs of higher quality food and ingredients and higher quality service, then they would do so (and they would be a high-quality restaurant, not a low-quality restaurant). So yes, the low-quality restaurant operators wouldn't attempt the signal, and so it does appear that award certificates are a good signal of quality.
However, not every high-quality restaurant can win an award certificate every year. So, what if the certificates on the wall are five or ten years old? Is that still a good signal of quality? I look at those ancient certificates (more than five years old), and I see a restaurant that is past its peak. It's on a downward slide into oblivion. It's not signalling high quality to me today, it's signalling that the restaurant used to be high quality, but not any longer.
There are two reasons why a restaurant would keep ancient award certificates on the wall. First, they are genuinely on the downward slide, but they want patrons to think that they are still high quality. But, if they were genuinely still high quality, they would still be winning award certificates. Given that they are not winning, then they are really signalling to patrons that they haven't maintained their previous quality.
Second, maybe the award certificates are given out in such a way that multiple winners are excluded. Call this the 'give everyone else a chance' effect. In that case, the award certificates are not such a great signal of quality, since they are not awarded to the highest quality restaurants, but to the highest quality restaurants that haven't been excluded for winning too many times. The quality of the signal is lessened, and patrons shouldn't pay as much attention to the award certificates.
So, a real high-quality restaurant, that hasn't won an award for several years, would probably be better off taking down their ancient award certificates, if they don't have any recent ones, then leaving those ancient certificates on the wall. Ancient restaurant award certificates are a negative signal of quality.
Changing tack now, I have a bunch of ancient award certificates myself - my teaching awards (six of them in total). I've been thinking about hanging them on my office wall. However, I haven't won an ward since 2020. Now that I've thought about restaurant signalling, I'm reconsidering whether I should hang those teaching award certificates on my office wall. Would they just signal that I'm on a downward slide? On the other hand, I continue to be nominated every year, and by multiple students every year. Maybe my lack of award winning is just the 'give everyone else a chance' effect at play?
[HT: Inspired by this Tyler Cowen post from December last year]
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[*] The patrons (the uninformed party) can also try to reveal the private information about restaurant quality. When the uninformed party (the party that doesn't know the private information) tries to credibly reveal the private information, this is what economists call screening.
[**] If that wasn't the case, then the certificate provides no signalling value at all.
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