Can mandatory certification promote greenwashing? A signaling approach

• Published date: 01 December 2020
• Author: Dolores Garrido,Ana Espínola‐Arredondo,Felix Munoz‐Garcia
• Date: 01 December 2020
• DOI: http://doi.org/10.1111/jpet.12445

J Public Econ Theory. 2020;22:1801–1851. wileyonlinelibrary.com/journal/jpet © 2020 Wiley Periodicals, Inc.

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Received: 17 December 2018

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Accepted: 5 April 2020

DOI: 10.1111/jpet.12445

ORIGINAL ARTICLE

Can mandatory certification promote

greenwashing? A signaling approach

Dolores Garrido |Ana Espínola‐Arredondo |Felix Munoz‐Garcia

School of Economic Sciences, Washington

State University, Pullman, Washington

Correspondence

Ana Espínola‐Arredondo, School of

Economic Sciences, Washington State

University, Pullman, 101B Hulbert Hall,

WA 99164.

Email: anaespinola@wsu.edu

Abstract

This paper examines how positive or negative per-

ceptions about innovation affect firms' strategic be-

havior when certifying their products. In particular,

we consider two types of firm (innovative and non-

innovative) which choose between three signals:

(a) certified claim, (b) uncertified claim, and (c) no

claim. The consumer, either exhibiting positive or

negative perceptions, is uninformed about the firm's

type and only observes the firm's claim. We find that

a separating equilibrium arises in which information

about the innovation is revealed to consumers. We

also identify a pooling equilibrium in which both

types of firm choose the same claim, concealing in-

formation from consumers. We show that regulation

requiring mandatory certification can hinder in-

formation transmission. Our results also indicate that

changes in product perceptions do not necessarily

facilitate information transmission.

1|INTRODUCTION

Consumers' perceptions toward innovations are heterogeneous and usually differ to the average

scientific opinion; see Messer, Costanigro, and Kaiser (2017).

1

Positive or negative perceptions

1

Funk et al. (2015) examine the discrepancies about scientific innovations between the U.S. citizens and experts of the

American Association for the Advancement of Science (AAAS). For instance, 87% of experts from AAAS indicate that

climate change is mostly a consequence of human activity, however, only half of the U.S. adults agree, and only 37%

sustain it is a grave problem. With regard to genetically modified organisms (GMOs), 88% of the experts maintain that

are safe, while only 37% of Americans believe that GMOs are safe.

are affected by consumers' beliefs on unobservable safety or health attributes of the product

(Bearth & Siegrist, 2016; Cardello, 2003; Caswell & Mojduszka, 1996; Siegrist, 2008), and other

environmental, social or ethical factors (Codron, Siriex, & Reardon, 2006).

2

Solar energy pro-

vides an example of positive perception among most consumers. Kennedy (2016) reports that

89% of the U.S. adults encourage the expansion of solar energy. In contrast, genetic engineering

in animals illustrates a case where most U.S. adults (79%) oppose genetic modification in

aquarium fish; see Funk and Hefferon (2018).

3

Since consumers cannot perfectly observe whether a product uses an innovation (such as

GMO ingredients), firms may rely on claims in the product's label to describe the presence or

absence of innovation. In such a context, asymmetric information favors the emergence of fraud

in the form of greenwashing, that is, a firm making false or misleading claims about the

environmental performance of its product; Delmas and Burbano (2011). Lyon and Maxwell

(2011) analyze greenwashing in a context of incomplete information between a firm and an

activist who may audit the firm, damaging its public image among consumers. However, they

understand greenwashing as a firm disclosing positive, but not negative, information about its

environmental performance. Instead, we interpret greenwashing as a firm making a false claim,

that is using a certified or uncertified label that does not coincide with its technology.

The practice of greenwashing is neither new nor occasional. Hamilton and Zilberman (2006)

report evidence of fraud due to greenwashing in the organic and GMO markets at their early

stages. In addition, Terrachoice (2010) finds that 32% of a total of 5,296 home and family green

products in the United States and Canada used false labels, 5% more than the previous year.

This paper seeks to study how asymmetric information promotes firms' greenwashing behavior

and whether the existence of mandatory certification helps to ameliorate such a behavior.

We consider a model with two types of firm (innovative or noninnovative),

4

each deciding

whether or not to signal to consumers its innovation. Specifically, the firm can either make: (a)

a third‐party certified claim; (b) a self‐reported (uncertified) claim; or (c) no claim. For example,

the firm can claim it uses organic ingredients by acquiring a USDA certification and including it

on the product's label; claim that its product uses organic ingredients without a third‐party

certification (i.e., including “organic”in its label without certification); or be silent about

whether or not the good is organic. Examples of these practices can be found in several markets.

For instance, in toilet paper, brands like Kleenex Cottonelle and Open Nature use third‐party

programs to certify their sustainable forestry practices (viz., the Forest Stewardship Council and

the Sustainable Forestry Industry, respectively). Other companies in this industry, however,

make uncertified claims such as Green Forest which includes “100% Recycled”in its packaging,

while other firms (such as supermarket brands) do not make any claim about the use of

recyclable materials. Similarly, in sweeteners market, brands like Florida Crystals use third‐

party certifications to confirm that their product is vegan, thus not containing animal products

2

GMOs, nanotechnology, microwave radiation, heat pasteurization and sterilization, among others, are examples of

innovations directly influencing perceptions on safety or health attributes; while clean or green technology (i.e.,

pollution abatement or environmentally friendly production process) influences perceptions on the second group of

unobservables.

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GMOs is a less extreme example about negative perceptions. For instance, Kopicki (2013) reports that 57% of survey

respondents in the U.S. expressed concerns about GMOs, being health issues and environmental impacts the two major

worries. Ganiere, Chern, and Hahn (2006) and Yue, Zhao, and Kuzma (2015) find similar results, with more than 30% of

consumers revealing a negative perception toward GMOs.

4

According to the United States Department of Commerce (2007), innovation is “the design, invention, development

and/or implementation of new or altered products, services, processes, systems, organizational structures, or business

models for the purpose of creating new value for customers and financial returns for the firm.”

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GARRIDO ET AL.

or processed with bone char; other brands like Wholesome make uncertified “Vegan”or

“Naturally Vegan”claims; and others, such as C&H, make no claims about its product vegan

features. More examples abound in the food industry, with firms that sell similar products

choose to make different claims (certified, uncertified, or no claim).

5

Our paper then con-

tributes to the literature on labeling with uninformed consumers by allowing for a more rea-

listic signal structure than in previous articles.

After observing the label, a consumer with either a positive or negative perception about the

innovation observes one of the three signals. She updates her beliefs about the firm using the

innovation or not, and responds by buying or not buying the product. Our model considers that

making no claims is costless for the firm, making an uncertified claim entails some costs

(although minor) but can be penalized by consumers if they realize that the company included

false claims in its label, and that acquiring a certification is the most costly signal for the firm.

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For generality, we allow for both innovators and noninnovators to acquire certificates, but

assume that the latter face a longer certification process and thus experience higher certification

costs. When third‐party agencies detect the noninnovator's type during the certification process,

acquiring a certification for this type of company is impossible, a setting that our model con-

siders as a special case by making its certification costs infinitely high. We also analyze the

effect that a regulation on certified claims produces on the dissemination of information.

We first examine the case in which a consumer has a positive perception about the in-

novation and, afterward, extend our setting to the case of negative perceptions. In both contexts

we study under which conditions separating and pooling Perfect Bayesian Equilibria (PBEs) are

supported. We show that an informative (separating) equilibrium can be sustained when the

cost of certification or the penalty from greenwashing are sufficiently high. In particular, under

positive (negative) perceptions the innovator (noninnovator) chooses a certified or uncertified

claim and the noninnovator (innovator, respectively) does not claim. Regardless of consumers'

perception about the innovation, a lengthy and costly process to obtain the certification, or hard

penalties from greenwashing, help to deter a firm that seeks to mimic the claim of its coun-

terpart. We also show the existence of uninformative (pooling) equilibria. We first identify an

equilibrium in which both types of firm certify their products, which holds when the certifi-

cation is easy to obtain or penalties are significantly low. In this context, the noninnovator

(innovator) under positive (negative, respectively) perceptions makes false claims.

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We also find

a pooling equilibrium in which both types choose an uncertified claim or no claim. Both

5

In breakfast cereals, for instance, some brands meet several third‐party certifications, such as Cascadian Farm, Kashi,

and Nature Path, displaying them on their packaging; others make uncertified claims, such as “Heart Healthy”or

“Original Antioxidants”(such as Kellogg's Smart Start); and most of them do not print any healthy claim (Kellogg's

Froot Loops). Likewise, in the market of chocolate fudge brownies, brands like King Arthur Flour go through third‐

party certification programs that confirm gluten‐free practices; other companies like Betty Crocker print “Gluten Free”

on their packaging without supporting it with a third‐party certification program; and others, such as Ghirardelli, do

not make any claims.

6

Environmental certification costs (monetary fees and time) vary across programs, certifying agencies, and countries.

For example, the minimum annual certification fee for the label supported by the non‐GMO Project is approximately

US$1,300, which can be considerably scaled‐up as the number of verified products increase and additional services like

inspectors are required. On average, the process can take from 3 to 6 months. (For more information, see https://www.

nongmoproject.org/product‐verification/technical‐administrators/).

7

According to Terrachoice (2010), between 2009 and 2010, the consumer electronics industry in North America pre-

sented the highest rate of greenwashing compared to other home and family products. Their study reveals that 50% of

total products surveyed in that category made false claims in regards of toxicity of components, energy efficiency,

recycled and biodegradable content, and use of vague environmental jargon. In the food industry, in 2017 the USDA

registered 42 complaints related to false organic claims violating the organic regulation. (For more details, see https://

www.ams.usda.gov/services/enforcement/organic/fraudulent‐certificates).

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