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 often the case for goods with differing environmental quality. 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 ‘‘green’’ goods. The only reliable way to improve product quality in the experiment, however, is to use a third party that charges a fee to certify product quality claims. 2001 Elsevier Science