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Green Lemons - Environmental Labels and Entry into an Environmentally Differentiated Market under Asymmetric Information

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  • Kuhn, Michael

Abstract

The paper inquires whether a public eco-label mitigatesadverse selection, where an ecologically superior (green) product variant is underprovided. A model, integrating entry into a perfectly competitive, vertically differentiated industry and rationally expected quality structure (REQS) under asymmetric information, provides conditions for the label, serving as screening device, to increase green supply and curb pooling. Perverse reactions entail decreasing green supply, enhanced pooling, or increasing non-green supply. It is shown that the common single crossing property disregards the impact of changes in REQS on absolute profitability and may misdiagnose firms' incentives to attain the label. if labelling causes market expansion, pollution may increase even if substitution towards the green variant occurs. However, this only happens if both variants are environmentally sensitive in a well-defined sense.

Suggested Citation

  • Kuhn, Michael, 1999. "Green Lemons - Environmental Labels and Entry into an Environmentally Differentiated Market under Asymmetric Information," Thuenen-Series of Applied Economic Theory 20, University of Rostock, Institute of Economics.
    • Handle: RePEc:zbw:roswps:20
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    References listed on IDEAS

    as
    1. Riley, John G, 1985. "Competition with Hidden Knowledge," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 958-976, October.
    2. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    3. De, Sankar & Nabar, Prafulla, 1991. "Economic implications of imperfect quality certification," Economics Letters, Elsevier, vol. 37(4), pages 333-337, December.
    4. Aaditya Mattoo & Harsha V. Singh, 1994. "Eco‐Labelling: Policy Considerations," Kyklos, Wiley Blackwell, vol. 47(1), pages 53-65, February.
    5. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-450, June.
    6. Crampes,C. & Ibanez,L., 1996. "The Economics of Green Labels," Papers 96.439, Toulouse - GREMAQ.
    7. Gary Biglaiser, 1993. "Middlemen as Experts," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 212-223, Summer.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Rinaldo Brau & C. Carraro, 2004. "The economic analysis of voluntary approaches to environmental protection. A survey," Working Paper CRENoS 200420, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    2. Mahenc Philippe, 2009. "Wasteful Labeling," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 7(2), pages 1-20, December.
    3. José Moraga-González & Noemi Padrón-Fumero, 2002. "Environmental Policy in a Green Market," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(3), pages 419-447, July.
    4. Takuro Miyamoto, 2023. "Green product diffusion and innovation in supply chains," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 25(3), pages 331-353, July.
    5. Aditi Sengupta, 2016. "Green Premium, Ecolabel, and Environmental Damage," Auburn Economics Working Paper Series auwp2016-16, Department of Economics, Auburn University.

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    More about this item

    Keywords

    asymmetric information; eco-labelling; entry; market structure; screening; vertical dif-ferentiation;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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