Asymmetric Information: End of Chapter Problem

You are driving on a trip and have two choices on the highway to stop for a snack: a well$-$known chain or a local restaurant that you have never heard of but that looks okay.

What lessons from this chapter might lead you to choose the chain even if you think that their food is just average?

Eating at the local restaurant presents an adverse selection problem. The owners of the local restaurant could have bought a franchise instead of operating independently, but their management skills are clearly insufficient for the chain's standards.

That the local restaurant is still local and not a chain is a signal that the local restaurant is worse than the chain. If the local restaurant were a better establishment, it is reasonable to expect it to grow to more than one location.

The chain has a stronger incentive to maintain its reputation than the local place$-$ you are likely to encounter another instance of the chain elsewhere, but the local restaurant will get you to buy at most one meal there.

Eating at the local restaurant presents a moral hazard problem. Once you are seated, the local restaurant can treat you poorly and it is likely you will not leave.