Association for Public Policy Analysis & Management

Organizations signal in order to communicate with stakeholders. Literature typically describes signaling behavior as an attempt to reduce information asymmetry between a producer and a consumer, and the signal as a mechanism to help consumers separate high and low quality services and products. In this conception, signals are designed to reduce asymmetry of information regarding the quality of the service or product. Spence signaling allows a producer to engage in a costly, but observable investment, in order to signal difficult to observe product quality.

The nature of signaling itself has been subject to considerable study. Signals can vary in strength, they can be multidimensional, and noisy signals are imperfectly related to the quality of the good.  Producers may attempt to send multiple signals, they may signal repeatedly, and their signals may be interpreted in context of other signals sent by other producers. Signals may be targeted a diversity of stakeholders, including shareholders, investors, employees, customers, tenants, or the broader community.

Certification or labeling is a form of signaling, where firms adhere to process, product, or performance standard in order to gain access to a proprietary product label. Increasingly, firms, governments, and non-profits have sought to send “green” signals, certifying environmental behavior or performance. Darnall and Aragón-Correa (2014) note several hundred ecolabels currently in use.

In contrast to Spence signaling that signals the private quality of a good or service, eco-certification frequently certifies the positive externalities supplied by a producer that might be unrelated to the performance of a product or service. Prakash and Potoski (2006) suggest a “green clubs” approach to understanding these institutional arrangements. Based in club good theory, firms undertake costly investments to improve environmental performance in order to gain an exclusive reputational improvement by being a member of the club. In contrast to Spence signaling, where signalers attempt to communicate the private good nature of the good or service and capitalize for providing a high quality product, green club signaling communicates the public good aspects of the good and allows firms to capitalize from the provision of a public good. Both approaches rely on information signaling but lead to distinct social outcomes.

A second dimension of signals explored in this paper is signal strength. Signals can be stronger or weaker, depending on the type of strategies employed by an organization (Lampel & Shamsie, 2000; Park & Mezias, 2005). Certifications can have varying stringency of standards and can represent whether a firm has certified business as usual, compliance, or beyond compliance behavior. Stronger signals may be more conspicuous and thus communicate different types of information to stakeholders. The complexity of these signals and their targets are not well understood. In this manuscript, we develop a 2x2 framework to understand green signaling based on these two dimensions of signaling behavior. We then leverage data from the Leadership in Energy and Environmental Design program, a popular multidimensional, multi-tier building certification program to illustrate the utility of this framework and provide insight about the content and targets of multidimensional signals.