Market Behavior with Environmental Quality Information Costs

Formally, eco-labels are modeled as tools that enable the mitigation of informational asymmetry on product environmental quality. We argue that even in the presence of an eco-label, markets for eco-friendly products may still be inefficient. We model eco-friendly goods as goods with environmental quality information costs. We induce buyers' preferences in laboratory posted offer markets with information costs on products' quality. We analyze the effect of varying information costs on market efficiency and consumer information demand. We also test for the effect of self-declared labels. We find that a low information cost introduces a friction not high enough to lead to adverse selection whereas a high information cost drives out high quality products. We find self-declared labels have a positive effect on market efficiency but only sellers benefit from self-declared labels. We find that demand for information follows the classic law of demand and that it is a non linear function of product price as theoretically expected. We also find that, when information costs are high, demand for information decreases when sellers use self-declared labels: either buyers use self-declared labels as an information-revelation device or reputational affects feedbacks are a substitute for information demand. We draw implications for the design of eco-labels.