Abstract
We analyse the optimality of information revelation of hidden attributes of “credence goods” via alternative labelling procedures. When consumers are heterogeneous in their willingness to pay for the hidden attribute, producers can either self-label their products, or have them certified by a third party. The government can impose self or third party labelling requirements on either the “green” or the “brown” producers. Our benchmark model develops a condition that links the optimal imposition of third party labelling to the relative market share of each type of the good under complete information. We extend our analysis to incorporate asymmetric information and cheating by the producers. When corrupt producers can affix spurious labels, the government needs to supplement the labelling policy with costly monitoring activities. We find that mandatory self-labelling schemes generally dominate mandatory third party labelling, unless the “market share effect” greatly exceeds the “incentive-to-cheat effect”.
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Acknowledgement
We thank Anthony Heyes, Ngo Van Long, Bernard Sinclair-Desgagné, two anonymous referees of this journal, and participants at the 2005 Canadian Economics Association conference and the 2005 Canadian Resource and Environmental Economics conference for helpful comments. Soham Baksi thanks the University of Winnipeg's Board of Regents for financial support for this research. Pinaki Bose gratefully acknowledges summer support for this research in form of a faculty research grant from the Fogelman College of Business and Economics and the Wang Centre of the University of Memphis. The usual disclaimer applies.
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Baksi, S., Bose, P. Credence Goods, Efficient Labelling Policies, and Regulatory Enforcement. Environ Resource Econ 37, 411–430 (2007). https://doi.org/10.1007/s10640-006-9032-0
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DOI: https://doi.org/10.1007/s10640-006-9032-0