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Monitoring Eco-Labels: You Can Have Too Much of a Good Thing

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  • Thomas Liebi
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    Abstract

    An increasing number of product labels is making environmental claims. Typically, these claims are non-verifiable to consumers, they represent a credence attribute of the product. The usual way to handle this problem is external monitoring of such labels. We consider a model where firms in a competitive market choose product quality and the intensity of monitoring. It is shown that all the firms producing the high quality credence good will choose the same level of monitoring, i.e., an industry standard will evolve. However, in a competitive equilibrium there will be more monitoring than is socially desirable.

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    File URL: http://www.vwl.unibe.ch/papers/dp/dp0207.pdf
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    Bibliographic Info

    Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0207.

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    Date of creation: Jul 2002
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    Handle: RePEc:ube:dpvwib:dp0207

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    Keywords: credence goods; labels; monitoring; product quality;

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    References

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    1. Winand Emons, 1994. "Credence Goods and Fraudulent Experts," Diskussionsschriften dp9402, Universitaet Bern, Departement Volkswirtschaft.
    2. Pil Choi, J., 1997. "Brand Extension as Informational Leverage," ISER Discussion Paper 0451, Institute of Social and Economic Research, Osaka University.
    3. Telser, L G, 1980. "A Theory of Self-enforcing Agreements," The Journal of Business, University of Chicago Press, vol. 53(1), pages 27-44, January.
    4. Luis Cabral, 2000. "Stretching Firm and Brand Reputation," Working Papers 00-07, New York University, Leonard N. Stern School of Business, Department of Economics.
    5. Emons, Winand, 2001. "Credence goods monopolists," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 375-389, March.
    6. Andersson, Fredrik, 2002. "Pooling reputations," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 715-730, May.
    7. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
    8. Thomas Liebi, 2002. "Trusting Labels: A Matter of Numbers?," Diskussionsschriften dp0201, Universitaet Bern, Departement Volkswirtschaft.
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    Cited by:
    1. Bandyopadhyay, Siddhartha, 2013. "Market thickness, prices and honesty: A quality demand trap," Mathematical Social Sciences, Elsevier, vol. 65(1), pages 52-59.
    2. Thomas Liebi, 2003. "The Demand for Tests," Diskussionsschriften dp0307, Universitaet Bern, Departement Volkswirtschaft.

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