Environmental Labeling and Incomplete Consumer Information in Laboratory Markets
Survey evidence suggests that consumers care about the environment and are willing to pay a higher price for a product that generates less environmental harm. We induce buyer preferences over quality in a laboratory posted offer market to study sellers' incentives to offer products of differing quality. Buyers are unaware of the product quality before purchase, as is the case for experience goods. We first document the market failure that arises from incomplete information when no signaling or reputations are possible. We then study various treatments that could remedy this failure. Seller reputations and unverified "cheap talk" signals sometimes increase the number of higher-valued 'clean' goods. The only reliable way to improve product quality in the experiment, however, is to use an external body that charges a fee to verify product quality claims.
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- Brozovsky, J. A. & Richardson, F. M., 1998. "The effects of information availability on the benefits accrued from enhancing audit-firm reputation," Accounting, Organizations and Society, Elsevier, vol. 23(8), pages 767-779, November.
- David Kreps & Robert Wilson, 1999.
"Reputation and Imperfect Information,"
Levine's Working Paper Archive
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- Boulding, William & Kirmani, Amna, 1993. " A Consumer-Side Experimental Examination of Signaling Theory: Do Consumers Perceive Warranties as Signals of Quality?," Journal of Consumer Research, Oxford University Press, vol. 20(1), pages 111-23, June.
- Matthews, Steven A. & Okuno-Fujiwara, Masahiro & Postlewaite, Andrew, 1991.
"Refining cheap-talk equilibria,"
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- Miller, Ross M & Plott, Charles R, 1985.
"Product Quality Signaling in Experimental Markets,"
Econometric Society, vol. 53(4), pages 837-72, July.
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