THE EFFECTS OF SMOKING LAWS ON SEATING ALLOCATIONS OF RESTAURANTS, BARS, AND TAVERNS

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1 THE EFFECTS OF SMOKING LAWS ON SEATING ALLOCATIONS OF RESTAURANTS, BARS, AND TAVERNS JOHN DUNHAM nd MICHAEL L. MARLOW* Supporters of smoking lws often rgue tht they do not hrm resturnts, brs, nd t erns nd my e en rise their profits. Opponents rgue tht owners cter to customer preferences regrding smoking nd tht lws mndting specific smoking policies will therefore negti ely impct profits of some firms. This rticle tests hypotheses regrding how smoking lws ffect seting lloctions, using dt from ntionwide sur ey of resturnt nd br owners. The empiricl e idence indictes tht smoking lws exert no significnt effect on seting lloctions. Firms re shown to llocte greter shres of seting to nonsmoking use when customers exhibit stronger preferences for such seting. I. INTRODUCTION Lws restricting smoking in resturnts hve been encted in 32 sttes. Supporters of these lws often rgue tht they do not hrm firms nd my even rise their profits. 1 Recent studies, for instnce, rgue tht outright bns on smoking in eting nd drinking plces hve not dversely ffected these estblishments, suggesting tht smoking bns either do not reduce demnd or lower costs for firms, which offsets sles losses, thus leding to no dverse chnges in profits. Opponents of smoking restrictions rgue tht owners cter to customer preferences re *This rticle is bsed on n erlier study tht ws conducted for Philip Morris Mngement Corportion. The uthors thnk Willim J. Boyes, Frnk J. Chloupk, nd two nonymous referees for helpful comments. Dunhm: Mnger of Fiscl Issues, Philip Morris Mngement Corportion, New York, New York, Phone , Fx , E-mil john120@idt.net Mrlow: Professor, Deprtment of Economics, Cliforni Polytechnic Stte University, Sn Luis Obispo, Cliforni, Phone , Fx , E-mil mmrlow@clpoly.edu 1. Proponents of smoking bns lso often rgue tht, bsent such restrictions, txpyers re forced to pick up prt of the higher helth cre costs of smokers in Medicid, Medicre nd privte insurnce progrms. However, Lee 1991, 1991b suggests tht smoking bns cn not be expected to lower this type of externlity. See lso recent Congressionl Reserch Service report for Congress Grvelle nd Zimmermn 1994, which rgues tht it is likely tht pssive smoke risk hs been overestimted by the Occuptionl Sfety nd Helth Administrtion. The July 1998 decision by U.S. District Judge Willim L. Osteen lso concluded fter five yers of court proceedings tht the EPA hd wrongly lbeled secondhnd smoke clss A crcinogen nd tht the gency relied on fulty science to rech the conclusion it wnted. grding smoking. Some owners would find it profitble to llow smoking throughout their estblishments, others to forbid ll smoking, nd still others to ccommodte both smokers nd nonsmokers by investing in prtitions, designting res, creting smoking ptios or rooms, nd or investing in ir filtrtion systems. They rgue tht lws tht mndte specific smoking policies will therefore negtively impct profits of some firms. Little economic reserch hs been published on the effects of smoking lws on revenues of resturnts, brs, nd tverns, nd none hs been directed towrd the issue of smoking nonsmoking seting lloctions. 2 This rticle provides frmework for exmining how customer preferences influence smoking nd nonsmoking seting lloctions by owners the primry policy tht firms unilterlly dopt in their ttempts to del with the issue. Hypotheses regrding how smoking lws ffect seting lloctions re then tested using dt from ntionwide survey of 1,300 resturnt, br, nd tvern owners. The empiricl evidence indictes tht smoking lws exert no significnt effect on seting lloctions. II. ECONOMIC MODEL AND TESTABLE HYPOTHESES Without legl restrictions, policies dopted by resturnts, brs, nd tverns towrd 2. See, for instnce, M. K. Evns unpublished dt, Glntz nd Smith 1994, 1997, nd Scicc nd Rtliff 1998 for studies of the effects of smoking lws on revenues of resturnts.

2 smoking re determined in much the sme mnner s decisions regrding menus, prices, nd hours of opertion. Profit-mximizing firms optimize on the bsis of customer demnd nd costs. Decisions pertining to smoking policies simply llocte the ir spce within firms between smoking nd nonsmoking customers. 3 The ir spce within n estblishment is considered just like ny other resource, nd owners decide to cter solely to smokers, to nonsmokers, or to both by providing ptrons with rights to smoke while ccommodting others through smoking nonsmoking res nd ir filtrtion systems. The choice depends on customer preferences nd reltive mrginl costs. 4 Predictbly, mrket segmenttion nturlly evolves where firms cter more to smokers in mrkets dominted by smokers thn in those mrkets dominted by nonsmokers. There my lso be brod differences between how owners of resturnts nd brs or tverns llocte seting. Customers of resturnts re likely to prefer tht owners dopt different ccommodtion strtegies thn would ptrons of brs nd tverns. Resturnt customers tend to dine in one loction within firms, nd therefore it is possible for owners to designte sections for smokers nd nonsmokers, nd this predictbly leds to reltively high lloction of nonsmoking seting. In contrst, customers of brs nd tverns my prefer to prticipte in vrious ctivities Ždining, drinking, listening to music, dncing, nd plying pool, drts, nd billirds. whereby they move to different loctions within the estblishment during their visit nd interct with different ptrons. It is reltively more difficult nd therefore costly to designte res for smokers nd nonsmokers in brs nd tverns, nd this predictbly leds to reltively low lloction of nonsmoking seting. Moreover, becuse of the interctive tmosphere of brs nd tverns, it is unlikely tht ll nonsmokers wish to remin sep 3. Lee 1991b rgues tht owners of privte estblishments hve n incentive to internlize externlities ssocited with smoking; see lso Tollison nd Wgner 1992 nd Boyes nd Mrlow Smoking policies my lso be influenced by preferences of owners, mngers, nd employers, but it is uncler tht their preferences would override those of customers when owners profit mximize nd hire in competitive lbor mrkets. rted from their smoking friends Žnd vice vers., nd therefore mny br nd tvern owners my find it reltively unprofitble Žnd unpopulr. to segregte these two groups. This resoning leds to the testble hypothesis tht the mix of smoking nonsmoking seting is influenced by the smoking preferences of customers so tht nonsmoking seting lloctions re inversely relted to the percentge of customers who smoke. It is lso possible tht the smoking chrcteristics of stte popultions my be significnt fctor explining whether stte governments pss smoking restrictions. We expect tht sttes with reltively few smokers re more likely to pss smoking lws. III. DESCRIPTION OF DATA Survey dt collected by Roper Strch for the Ntionl Licensed Beverge Assocition is used to exmine how smoking lws influence seting lloctions. The survey ws conducted by telephone interviews during the period of September 5 12, All interviewing ws conducted from the Roper Strch centrl interviewing fcility. The smple consisted of owners mngers of 1,300 rndomly drwn resturnts Ž650. nd brs or tverns Ž650. cross the United Sttes. Smples were drwn in sttisticlly rndom mnner from ntionl lists provided by Survey Smpling, Inc., mjor supplier of survey smples to reserch orgniztions. To the extent tht the Survey Smpling lists include most full-service resturnts nd brs or tverns in the United Sttes, the survey results re pplicble to ll such estblishments with mximum smpling error of pproximtely plus or minus four percentge points for ech smple of estblishments. The survey instrument ws developed by Roper Strch nd includes questions pertining to seting lloctions, ttitudes towrd smoking lws, strtegies to del with smoking nonsmoking customers, revenues, nd projections of effects of smoking lws on revenues. IV. TESTING WHETHER SEATING ALLOCATIONS ARE INFLUENCED BY CUSTOMER PREFERENCES Selected summry sttistics demonstrte tht firms in the smple differentite themselves by number of chrcteristics, includ

3 ing chin ffilition, ge, nd size. The rnge of employment in brs nd tverns is workers, nd for resturnts it is workers. 5 Firms lso differentite themselves on how they cter to smoking nd nonsmoking preferences of customers. Alloctions rnge from strict prohibition, mixes of smoking nd nonsmoking seting, nd smoking llowed throughout estblishments. For resturnts, the verge percentge of seting tht is llocted to nonsmoking is 54%, while for brs nd tverns it is 5% this difference is consistent with expecttions. Both types of estblishments hve cses where smoking is entirely prohibited, nd both hve cses where smoking is llowed throughout the estblishment. Of owners mngers of resturnts who offer nonsmoking seting section, more thn twothirds indicte tht this is product of their own policy. For brs offering prtil nonsmoking seting, more thn hlf of mngers owners indicte tht this is result of their own policy. The dt indicte tht both complete nd prtil nonsmoking environments exist in privte mrkets with nd without smoking lws. 6 Tble I displys mens nd stndrd devitions ssocited with three vribles: percent of seting llocted to nonsmoking use, percent of smokers in the dult popultion, nd the percent chnge in the dult smoker popultion over , nd for three sm 5. Zero workers mens tht the firm is entirely run by the owner nd or fmily. 6. The dt re limited in tht they test the knowledge of owners bout the source of the smoking lw. There were mny locl smoking restrictions in plce during the period when the survey ws conducted; however, most of the more restrictive lws were put in plce fter ples: ll sttes, sttes with smoking lw, nd sttes without smoking lw. While the verge nonsmoking seting lloction from sttes with nd without smoking lw does not differ significntly, significnt differences exist for the other two vribles Žsignificnce t 5% level.. Tht is, sttes with smoking lws tend to hve fewer smokers nd tend to hve much lrger reductions in smoking popultions. Figure 1 displys distributions of the shres of sets devoted to nonsmoking in the sttes with nd without smoking lws. For instnce, 57% of firms in the sttes without smoking lws devote 0% 20% of their seting to nonsmoking use, s opposed to 62% of firms in sttes with smoking lws. Within this grouping, 52% of firms in sttes without smoking lws ctully devote 0% of their seting to nonsmoking use, nd 59% of firms in sttes with smoking lws devote 0% of their seting to nonsmoking use. At the other extreme, 16% of firms in sttes without lws devote 81% 100%, s opposed to 18% of firms in sttes with lws. Within this grouping, 14% of firms in sttes without smoking lws ctully devote 100% of their seting to nonsmoking use, nd 16% of firms in sttes with smoking lws devote 100% of their seting to nonsmoking use. Assuming tht the distribution surrounding firms in no-lw sttes is the expected distribution, the chisqure test indictes t the 5% level tht we cnnot reject the hypothesis tht the distribution surrounding firms in smoking lw sttes does not differ significntly from tht of firms in no-lw sttes. Therefore, the distribution of the shres of nonsmoking seting does not pper to differ between these two smples. It is importnt to note tht this Nonsmoking seting Ž% of totl seting. TABLE I Mens nd Stndrd Devitions All Sttes Sttes with Smoking Lws Sttes without Smoking Lws ( n 1300 ) ( n 968 ) ( n 332 ) 29.5 Ž Ž Ž38.3. Smokers Ž% of popultion. Ž3.2. Ž3.2. Ž2.0. Smoker chnge Ž. % chnge, Ž Ž2.2. Note: Stndrd devitions re displyed in prentheses below the mens..003 Ž1.6.

4 FIGURE 1 dt set ws developed in 1996 nd my not reflect the implictions of de fcto complete smoking bns such s the one tht now exists in Cliforni. Mny other fctors my lso influence lloctions of seting into smoking nonsmoking designtions. The size of firm Že.g., number of employees. my influence decisions when scle economies exist in ctering to both smoking nd nonsmoking popultions. A positive reltionship between firm size nd nonsmoking seting lloctions my occur if lrger firms my more esily seprte smokers from nonsmokers. Whether n estblishment is member of corporte chin or n independent firm my lso ffect the lloction decision. Chin members my offer greter ccommodtion s n element in their overll corporte strtegy. If this is the cse, then chin members would offer greter nonsmoking seting lloctions thn independents. Yers in business my lso influence seting lloctions, since estblished reputtions my ttrct different mix of customers, nd there my be differentil ccommodtion costs relted to ge of buildings. It is possible tht older businesses my tend to ccommodte less, given tht their owners tend to cter to more estblished nd stble customer bses thn newer businesses. Tble II displys estimtes from three regression equtions. 7 Column 1 contins estimtes of n ordinry lest squres regression of nonsmoking seting on smoking lws. Ž 1. NS i f Ž Smoklw i., where NS i percentge of seting tht is nonsmoking Smoklw i 1 if smoking lw present; 0 otherwise. No significnt reltion is determined by this simple regression, thus indicting tht smoking lws do not pper to influence seting lloctions of owners. In column 2 of Tble II, we instrument for smoking lws with tobcco mnufcturing in the stte becuse there re vrious fctors relting to the socil cceptbility of 7. Significnt reltions re ssumed to be those meeting sttisticl significnce t 5% Žtwo-tiled. levels or greter.

5 TABLE II Ordinry-Lest-Squres Results % Nonsmoking % Nonsmoking Dependent Vrible seting Smoking Lw Seting Constnt Smoking lw ŽYes 1, No 0. Tobcco mnufcturing Smoking lw instrument Smokers * Ž Ž Ž Ž * Ž Ž Ž % chnge in smokers 0.26 Ž0.57. Chin member ŽYes 1, No 0. Yers in business Number of employees Br ŽYes 1, No Ž Ž Ž Ž Adjusted R-squred Men dependent vrible F-sttistic Observtions 1,300 1,300 1,300 Note: t-sttistics in prentheses. Significnce t 1% level. smoking tht my influence the smoking lw vrible tht re hypothesized to seprtely influence seting lloctions s well. The presence of tobcco mnufcturing fcility in stte serves s good proxy for these fctors, since these fcilities tend to be concentrted in sttes where tobcco growing nd employment mke up lrge prt of the economy. Sttes with lrger percentge of people involved in the tobcco industry my be less likely to pss severe restrictions on tobcco use in generl. Eqution Ž.is 2 estimted by ordinry lest squres: Ž. Ž. 2 Smoklw i f Tobmn i, where Tobmn i dollr vlue of stte tobcco mnufcturing in 1994 Ž$M.. The tobcco-mnufcturing vrible, which exerts sttisticlly significnt nd negtive influence on the smoking lw vrible, indictes tht sttes with sizeble tobcco mnufcturing will tend to not pss smoking lws. Ordinry-lest-squres estimtion of eqution Ž 3.tests the hypothesis tht privte mrkets llocte nonsmoking seting subject to the following vribles: smoking lw Žinstrument., incidence of smoking in the dult popultion, chnges in smoking incidence, whether the firm is prt of corporte chin or independent, firm size, yers in business, nd whether the firm is resturnt or br or tvern. 8 Ž 3. NS f ŽSmoklw, S95, S9589, i i i i Chin i, Yers i, Size i, Br i., 8. Vribles obtined outside of the survey re: smoking lw is obtined from the Tobcco Institute s Stte Smoking Restriction Lws unpublished dt ; ll other dt obtined from the Center for Disese Control. The smoking rte dt mesure the prevlence of current cigrette smoking mong dults, nd re generted by the Behviorl Risk Fctor Surveillnce System. The tobcco mnufcturing vrible mesures csh receipts from tobcco lrge enough to be seprtely reported by the Center for Disese Control.

6 where S95 i is the percentge of dult popultion tht smokes, S9589 i is the chnge in percentge of dult popultion tht smokes from 1989 to 1995, Chin i is 1 if firm is prt of corporte chin; 0 otherwise Size i is the number of full- nd prt-time employees, Yers i is the number of yers in business, Br i is 1 if br or tvern; 0 if resturnt. Eqution Ž. 3 ssumes tht smoking lws do not directly influence smoking behvior in wy tht would seprtely influence the owners lloction of nonsmoking seting. A counter-hypothesis tht stte smoking lws themselves my cuse fewer citizens to smoke implies simultneous equtions bis in our estimtion. However, while the intent of some smoking lws is to decrese smoking, the primry intent is to control smoking, nd especilly exposure to secondhnd smoke, within resturnts, brs nd tverns. 9 While mny dvoctes of smoking lws might lso prefer tht smoking decline outside of these estblishments s well, this is clerly of secondry importnce for these prticulr types of restrictions. Moreover, we re unble to test whether smoking lws led to less smoking by customers Žnd therefore leds owners to llocte less seting to smokers. simply becuse this requires time-series dt tht is unvilble. Such dt my become vilble in the future, but t this point we know of no other dt tht mesures seting lloctions nd none tht provides such series over time. It is lso uncler tht smoking lws would significntly ffect smoking behvior becuse of less-thn-perfect enforcement. Anecdotl evidence ppers to suggest tht those businesses tht would be most dversely ffected by smoking lws Ži.e., those ctering to reltively high numbers of smokers. would lso prefer relxed enforcement of smoking 9. Scic nd Rtliff 1998, writing in the Americn Journl of Helth Promotion, mention reduction in exposure of nonsmokers to ETS Ženvironmentl tobcco smoke. first in the resons for why lws prohibiting smoking in resturnts re pproved. They lso suggest tht these lws provide n dditionl incentive nd supportive environment for smokers to quit, but this resoning ppers secondry in importnce. Moreover, Cliforni pproved totl smoking bn in ll resturnts nd brs bsed on protection of employees from ETS, once gin indicting tht ny effects on smoking behvior outside of these estblishments to be secondry. lws. 10 To the extent tht this is true, smoking lws my not be prticulrly effective in lowering smoking both within nd outside resturnts, brs nd tverns nd in this cse my not be prticulrly effective in chnging owners lloction of nonsmoking seting. 11 Estimtion results of eqution Ž 3. re presented in the third column of Tble II. 12 The smoking lw instrument does not exert significnt effect on seting lloctions. The incidence of smoking in the dult popultion, however, exerts negtive nd sttisticlly significnt effect on nonsmoking seting. Tht is, firms llocte less seting to nonsmoking use s the percentge of smokers rise in the popultion reltionship consistent with expecttions. Chnge in the nonsmoking popultion exerts no sttisticlly significnt influence on seting lloctions. As hypothesized, ffilitions with chin nd firm size re significntly nd positively relted to the percentge of nonsmoking seting. As hypothesized, yers in business exert negtive effect on nonsmoking seting but is only significnt t the 10% percent level. Finlly, the dummy vrible for brs nd tverns exerts significnt nd negtive influence on seting lloctions, s consistent with expecttions. Tht smoking lws re not significnt determinnts of nonsmoking seting deserves further discussion. The dt for this nlysis were developed in 1996, prior to the estblishment of mny highly restrictive locl smoking ordinnces. In the cse where smoking is bnned Žnd enforced. throughout estblishments or is limited so tht it becomes extremely inconvenient to smoke the results of the nlysis will not pply. However, when smoking lws llow for the ccommodtion of both smokers nd nonsmok 10. Newspper rticles on the smoking bn in Cliforni, for exmple, document widespred civil disobedience; see, Blnkstein 1998, Cnto 1998, nd Risling Chloupk nd Sffer 1992 find no evidence tht stte-wide smoking bns in resturnts hve ny effect on smoking s mesured by cigrette consumption. 12. We included cross-effects between numbers of employees nd smoking lw vribles nd between smoking lw nd br vribles, but neither exerted sttisticlly significnt effects. In ddition, while it would be pproprite to control for intrstte correltion in our regressions, this is not possible given the smll number of observtions of mny sttes.

7 ers, sttes with reltively high percentges of nonsmokers lso tend to hve reltively high lloctions of spce devoted to nonsmoking uses. This suggests tht, in mny cses, smoking lws re encted fter the fct in the sense tht they pper fter the privte mrket hs lredy rellocted resources in profit-mximizing wys. Tht is, firms find it profitble to llocte more spce to nonsmokers, s these customers become more importnt to their overll revenues. A smoking lw will not lter lloction of spce when firms themselves hve lredy met smoking preferences of customers, provided tht the lws do not mndte tht nonsmoking spce significntly exceed tht provided voluntrily by owners. Of course, nother interprettion my be tht restrictive lws re simply not highly enforced nd re therefore ineffective in ltering nonsmoking spce within resturnts, brs or tverns. 13 V. CONCLUSIONS Proponents of lws restricting smoking within resturnts, brs, nd tverns rgue tht they re necessry bsed on the belief tht owners will underllocte nonsmoking seting in their estblishments. This rticle provides the following insights into this issue. First, in the bsence of outright smoking bns, firms llocte greter shres of seting to nonsmoking use when their customers exhibit stronger preferences for such seting. In other words, the privte mrket lloctes ir spce resources within firms with or without smoking restrictions, nd it is unlikely tht removl of smoking lws would overturn this result. In fct, there is no evidence tht smoking lws themselves ffect the seting lloction decisions, thus indicting tht privte mrkets hve lredy delt effectively with the smoking issue in the sense tht, in the bsense of outright smoking bns, firms tend to voluntrily llocte in excess of government mndtes or tht enforcement of smoking lws is imperfect. 13. In this event, however, it would pper tht if these lws were enforced, they would tend to lower profits of some owners. Second, the rticle suggests tht the continued decline of smokers s shre of the popultion will encourge the owners of hospitlity estblishments to llocte more spce to nonsmoking customers. This relloction rises becuse of the profit motive nd ppers to be n ctive process within the resturnt, br, nd tvern industries. Economic exmintion of the timing of these decisions how quickly do owners rellocte their seting spce to chnges in numbers of nonsmokers would be useful ddition to our reserch. At this point, however, timeseries dt re unvilble tht would llow us to exmine the speed of seting relloctions by owners towrd nonsmokers. REFERENCES Blnkstein, Andrew. Enforcement Clouds Issue of Smoking Bn, Los Angeles Times, September 21, 1998, 3. Boyes, Willim J., nd Michel L. Mrlow. The Public Demnd for Smoking Bns. Public Choice, July 1996, Cnto, Minerv, Clifornins Puff on Despite Bn, Wshington Post, September 24, 1998, Sec. A., p. 7. Chloupk, Frnk J., nd Henry Sffer. Clen Indoor Air Lws nd the Demnd for Cigrettes. Contemporry Policy Issues, April 1992, Glntz, Stnton A., nd Lis R. A. Smith. The Effect of Ordinnces Requiring Smoke-Free Resturnts on Resturnt Sles. Americn Journl of Public Helth, July 1994, The Effect of Ordinnces Requiring Smoke- Free Resturnts nd Brs on Revenues: A Follow-Up. Americn Journl of Public Helth, October 1997, Grvelle, Jne G., nd Dennis Zimmermn. Cigrette Txes to Fund Helth Cre Reform: An Economic Anlysis. Mrch 8, 1994, Congressionl Reserch Service Report for Congress. Lee, Dwight, R. Environmentl Economics nd the Socil Cost of Smoking. Contemporry Policy Issues, Jnury 1991, Government v. Cose: The Cse of Smoking. Cto Journl, Spring 1991b, Risling, Greg. Lw Hsn t Completely Brred Smoking in Tverns. Los Angeles Times, September 23, 1998, A3. Scicc, John P., nd Michel I. Rtliff. Prohibiting Smoking in Resturnts: Effects on Resturnt Sles. Americn Journl of Helth Promotion, Jnury 1998, Tollison, Robert D., nd Richrd E. Wgner. The Economics of Smoking. Norwell, Mss: Kluwer Acdemic, 1992.