Warning labels on unhealthy food products are an increasingly common policy tool to combat obesity. Although informing consumers usually improves their welfare, supply-side responses can either offset or amplify the positive effects of food labels.
This paper studies the equilibrium effects of a regulation in Chile that mandates the use of warning labels on products whose sugar or calorie concentration exceeds certain thresholds. Using scanner data from Walmart, we find an overall decrease in sugar and calorie intake of 9% and 7% after the policy. To reveal mechanisms, we zoom in on the breakfast cereal market. On the demand side, we show that consumers substitute from labeled to unlabeled products. This effect is mostly driven by products which, according to survey-based evidence, consumers mistakenly believed to be healthy. On the supply side, we find substantial reformulation of products and bunching just below the regulatory thresholds. We develop and estimate a model of supply and demand for food and nutrients. Consumers care about products' price, taste, and nutritional content but have poorly calibrated beliefs about nutrition. Firms choose products' prices and nutritional content to maximize profits.
We find that food labels increase consumer surplus by 3.6% of total expenditure. These effects are enhanced by firms' responses. We then use the model to study alternative policy designs. Under optimal policy thresholds, food labels cause gains in average consumer surplus similar to those of optimal sugar taxes but benefit the poor relatively more.
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More information on this seminar can be found on VERBseminar.org. Registration is required and can also be done there.
Organisers
- Tinna Laufey Ásgeirsdóttir (University of Iceland)
- Ana Inés Balsa (Universidad de Montevideo)
- John Cawley (Cornell University)
- Hans van Kippersluis (Erasmus University Rotterdam)