Inefficient NGO labels: Strategic proliferation and fragmentation in the market for certification

• Date: 01 June 2018
• Author: Steve Martin,Anthony Heyes
• DOI: http://doi.org/10.1111/jems.12236
• Published date: 01 June 2018

Received: 29 July 2016 Revised: 4 October 2017 Accepted: 22 October 2017

DOI: 10.1111/jems.12236

ORIGINAL ARTICLE

Inefficient NGO labels: Strategic proliferation and fragmentation

in the market for certification

Anthony Heyes1,2 Steve Martin1

1Department of Economics,

Universityof Ottawa, Ottawa, ON,

Canada (Email: aheyes@uottawa.ca;

smart041@uottawa.ca)

2Department of Economics, University of

Sussex, Brighton, UK

Heyesgratefully acknowledgesfinancial

support from CRCand SSHRC under Insight

Grant435-2012-472. Mar tin acknowledges

financialsuppor t from SSHRCthrough its

CanadianGraduate Scholarship program.

Weare grateful to Sandeep Kapur (London),

MikeAbito (Wharton), seminar par ticipants at

UniversityCollege London, and the 14th

AnnualIIOC in Philadelphia, as well as two

anonymousreferees and a coeditor of this

journal forhelpful comments. Er rors are ours.

Abstract

Nongovernmental organization (NGO) certification is a prerequisite for corporate

engagement in enhanced social behaviors in many settings. Labels with broad scope

(like “sustainability”) coexist with niche competitors much narrower in scope (like

“bird-friendliness”). When NGOs compete for adoptions, the wrong suite of schemes

emerges, providing a rationale for regulation. An incumbent NGO may strategically

narrow the breadth of its label to deter entry of competing schemes, reducing welfare.

Even when entry is accommodated, welfare is compromised. Modeling multi-issue

competition between NGOs allows us to be the first to analyze label fragmentation

and provide a novel perspective on proliferation that has frustrated practitioners.

1INTRODUCTION

In many settings, a firm is more profitable if it is seen to behave in a socially responsible way. Some consumers may be willing

to pay a premium for its product, a workermight be willing to work for a lower wage, a regulator might be less likely to subject it

to the burdens of audit, and so on (e.g., Baron, 2011; Winston, 2015). Although this gives profit-motivated firms an instrumental

incentive to bundle their products with pro-social behaviors—to engage in what Besleyand Ghatak (2007) have called “retailing

public goods”—they often find it difficult to communicate credibly such behavior to outsiders. A firm may say that it behaves

well, but why should people believeit? To overcome this information gap firms typically rely on credible nongovernmental orga-

nizations (NGOs) as certifiers, such that NGO run labeling schemes are now common in the retail landscape.1The relationship

between firms and their certifiers is symbiotic. An NGO willing to certify a behavior is fundamental for a profit-motivated firm

to be willing to engage in it, but equally NGOs that want to achieve impact (Duncan, 2004; Scharf, 2014) rely on their labels

being adopted by firms. The social engagement behaviors of firms both influence, and are influenced by, the design of labeling

schemes.

Motivated by the real-world social labeling context, wedevelop the first model in which competing NGOs design and operate

labeling schemes in a horizontal setting in which schemes can vary in the breadth of behaviors to which they relate. The scope

of a labeling scheme—whether it applies to a wide set of behaviors, or a narrower nichebehavior—is a crucial design dimension

along which NGOs compete for adoption of their label to produce social impact. The resulting issue of fragmentation in NGO

certification is one that has been much-debated in practitioner circles. Readers will be familiar with a variety of wide labels

that attest to very broad things such as “sustainability” and “fair-trade,” embodying multiple dimensions of behavior, as wellas

much more narrowly focused schemes. To illustrate concretely what we have in mind, consider the two labels in Figure 1. On

theleftsideisanexampleofanarrow label (the Smithsonian label that attests to a product having been made in a bird-friendly

way), on the right a wide label (the Wildlife Friendly Enterprise Network label says a product has been made in a way friendly

to wildlife in general, including birds).

206 © 2017 Wiley Periodicals, Inc. J Econ Manage Strat. 2018;27:206–220.wileyonlinelibrary.com/journal/jems