How consumers respond to product certification and the value of energy information

• Date: 01 June 2018
• Author: Sébastien Houde
• DOI: http://doi.org/10.1111/1756-2171.12231
• Published date: 01 June 2018

RAND Journal of Economics

Vol.49, No. 2, Summer 2018

pp. 453–477

How consumers respond to product

certification and the value of energy

information

S´

ebastien Houde∗

I study how consumers respond to competing pieces of information that differ in their degree of

complexity and informativeness. In particular, I study the choice of refrigerators in the United

States, where a mandatory disclosure labelling program provides detailed information about

energy cost, and a certification labelling program provides a simple binary-star rating related

to energy use. I find that the coarse certification may help some consumers to pay attention to

energy information, but for others, itmay crowd out efforts to process more accurate,but complex,

energy information. The effect of the certification on overall energy use is thus ambiguous.

1. Introduction

In several markets, firms must disclose detailed information about certain dimensions of

product quality while being subject to certification programs that provide simpler information

signals about these same dimensions of quality. For instance, in the United States, the Centers

for Medicare and Medicaid Services publish a booklet with detailed information about Medicare

Advantage contracts together with a five-star rating that ranks these contracts along a single

dimension. In the financial sector, publicly traded firms disclose detailed financial and operating

information, but credit rating agencies also assign letter grades, a coarse summary of the default

risk, on which investors rely heavily.

In these various settings, consumers and investors are exposed to competing pieces of

information that differ in their degree of complexity and informativeness. A rationale to offer

a certification that provides a coarse summary of otherwise readily available information is

that consumers may differ in their ability to collect and process information. As a result, some

consumers might prefer to rely on simple and salient pieces of information, and forgo more

accurate, but harder to process, information. This article investigates whether consumers trade

off coarse and complex information.

My focus is on energy labels, which are important policies, in the United States and else-

where, used to induce consumers to purchase more energy-efficient durables, and ultimately

∗ETH Z¨

urich, Switzerland; shoude@ethz.ch.

I am indebted to James Sweeney,Wesley Hartmann, Jonathan Levin, and John Weyant for all their helpful advice. I would

also like to thank Lawrence Goulder, Matthew Harding, Kenneth Gillingham, Anant Sudarshan, James Sallee, Charles

Mason, David Rapson, Gautam Gowrisankaran, Nicolai Kuminoff,Anna Alberini, and numerous seminar participants.

C2018, The RAND Corporation. 453

454 / THE RAND JOURNAL OF ECONOMICS

FIGURE 1

ENERGY LABELS FOR THE US APPLIANCE MARKET [Color figure can be viewed at

wileyonlinelibrary.com]

address externalities associated with energy use. For instance, the Federal Trade Commission re-

quires each appliance model offered in the United States to prominently display the EnergyGuide

label, which provides detailed information about energy use and operating cost (Figure 1(b)). At

the same time, appliance manufacturers can also certify their products using the ENERGY STAR

(ES) certification, a binary-star rating that identifies the most energy-efficient models within a

product class (Figure 1(a)). The main rationale of the ES program is to offer a simple heuristic to

compare products in the energy dimension.

Toanswer whether consumers trade off energy information, I estimate a choice model using a

theory of rational attention allocation (Sims, 2003).1The model takes the form of an information

acquisition model (e.g., Stigler, 1961; McCall, 1965; Gabaix et al., 2006), where consumers

select to rely on different pieces of information or even dismiss all energy information altogether.

Using this framework, I show that a coarse certification may not necessarily improve welfare

if consumers are heterogeneous in their costs of collecting and processing information. The ES

certification may help some consumers find energy-efficient products, but for other consumers,

it may crowd out the effort to collect and process more detailed and accurate information.

I estimate the model with microdata on the US refrigerator market. I find that a fraction of

consumers value the ES certification well beyond the energy savings associated with certified

products. Others rely on a local measure of electricity cost and do not value the certification;

this fraction of consumers is more prevalent among the higher-income group. A large fraction

of consumers also appears to neither value the certification nor consider energy operating cost,

and this fraction is much larger for the lower-income group. Each latent type is identified by

1Recently, Sallee (2014) also proposed a model of rational attention allocation to study why consumers might be

inattentive to energy information.

C

The RAND Corporation 2018.