Association for Public Policy Analysis & Management

Consumers’ perceptions towards innovations are heterogeneous and usually differ to average opinion in the scientific community. GMOs illustrate the complexity of how uncertainty about innovations affect consumer preferences. Since consumers cannot observe whether a product contains an innovation, firms may rely on claims in the product’s label. Asymmetric information favors the emergence of fraud in the form of greenwashing, where a firm makes false claims. We consider a model where a firm decides whether to signal to consumers its use of innovation by making a: (i) certified claim; (ii) self-reported (uncertified) claim; or (iii) no claim. A consumer with either positive or negative perceptions about the innovation observes one of the signals, and responds buying or not buying the product. We also analyze the effect of regulation on mandatory certification.

We examine under which conditions separating and pooling equilibria are supported. We show that an informative (separating) equilibrium is sustained when the cost of certification or the penalty from greenwashing are high. Regardless of consumers’ perception, a lengthy and costly process to certify or hard penalties help to deter greenwashing. The existence of uninformative (pooling) equilibria also arises and a change in perceptions does not affect its emergence. We demonstrate that penalties from greenwashing, rather than educational programs aimed to change consumers’ perceptions, facilitate information revelation. Finally, we consider the effect of mandatory certification on information transmission. We find that this regulation can also hinder the existence of the pooling equilibrium, thus helping the dissemination of information. However, we show that mandatory certification can be useless in contexts in which only one type of firm chooses uncertified claims in the absence of regulation. In these settings, mandatory certification only adds administrative costs without improving the dissemination of information to consumers