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Honest versus Misleading Certification

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  • Philippe Mahenc

Abstract

This paper questions the honesty of third‐party certification in the market for a good whose environmental quality is not observable by consumers. The certifier maximizes a weighted sum of its own revenue and social welfare. The higher the relative weight placed on revenue, the stronger the certifier's incentive to mislead consumers. Certification is analyzed as a costly signaling mechanism that, besides displaying labels, transmits information through market prices. Honest certification requires that prices credibly signal environmental quality to prevent cheating. I show that certification can only be honest when the certifier is driven more by social welfare than by profit. In the reverse case, the certifier cannot help jamming the price signal, thereby granting unreliable labels.

Suggested Citation

  • Philippe Mahenc, 2017. "Honest versus Misleading Certification," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(2), pages 454-483, June.
    • Handle: RePEc:bla:jemstr:v:26:y:2017:i:2:p:454-483
    DOI: 10.1111/jems.12195
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    Cited by:

    1. Liu, Qian & Fang, Debin, 2025. "Deceptive greenwashing by retail electricity providers under renewable portfolio standards: The impact of market transparency," Energy Policy, Elsevier, vol. 202(C).
    2. Goel, Rajeev K. & Nelson, Michael A., 2020. "Do external quality certifications improve firms’ conduct? International evidence from manufacturing and service industries," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 97-104.
    3. Hulshof, Daan & Jepma, Catrinus & Mulder, Machiel, 2019. "Performance of markets for European renewable energy certificates," Energy Policy, Elsevier, vol. 128(C), pages 697-710.
    4. Creane, Anthony & Jeitschko, Thomas D. & Sim, Kyoungbo, 2022. "Welfare effects of product certification under latent adverse selection," International Journal of Industrial Organization, Elsevier, vol. 81(C).
    5. Anthony Heyes & Sandeep Kapur & Peter W. Kennedy & Steve Martin & John W. Maxwell, 2020. "But What Does It Mean? Competition between Products Carrying Alternative Green Labels When Consumers Are Active Acquirers of Information," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 7(2), pages 243-277.
    6. Otrachshenko, Vladimir & Hartwell, Christopher A. & Popova, Olga, 2023. "Energy efficiency, market competition, and quality certification: Lessons from Central Asia," Energy Policy, Elsevier, vol. 177(C).
    7. Philippe Mahenc & Alexandre Volle, 2021. "Price Signaling and Quality Monitoring in Markets for Credence Goods," Working Papers hal-03098440, HAL.
    8. Dolores Garrido & Ana Espínola‐Arredondo & Felix Munoz‐Garcia, 2020. "Can mandatory certification promote greenwashing? A signaling approach," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 1801-1851, December.
    9. Qianjing Zhu & Xianglian Zhao & Meihua Wu, 2024. "Third-party certification: how to effectively prevent greenwash in green bond market? –analysis based on signalling game," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 26(6), pages 16173-16199, June.
    10. Frank Wijen & Mireille Chiroleu-Assouline, 2019. "Controversy Over Voluntary Environmental Standards: A Socioeconomic Analysis of the Marine Stewardship Council," PSE-Ecole d'économie de Paris (Postprint) halshs-02071504, HAL.
    11. Liu, Ting & Ma, Ching-to Albert, 2024. "Equilibrium information in credence goods," Games and Economic Behavior, Elsevier, vol. 145(C), pages 84-101.
    12. Philippe Mahenc & Alexandre Volle, 2021. "Price Signaling and Quality Monitoring in Markets for Credence Goods," CEE-M Working Papers hal-03098440, CEE-M, Universtiy of Montpellier, CNRS, INRA, Montpellier SupAgro.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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