24 February: Dolores Garrido (QSMS Seminar)

Presenting “Signaling under Bilateral Uncertainty: Do Green Consumers Lead to More Greenwashing?” at 12:15-13:30 in QA406.


On 24 February  2020, we have Dolores Garrido of Washington State University visiting us. She is going to give a seminar on “Signaling under Bilateral Uncertainty: Do Green Consumers Lead to More Greenwashing?” at 12:15-13:30 in room A406 in Building Q, Budapest University of Technology and Economics, Faculty of Economic and Social Sciences, Magyar tudósok körútja 2, 1117 Budapest. Sandwiches will be provided. Please help the organisers by registering in advance at egervari.zsuzsanna@qsms.bme.hu Registration is free.
Also, see our Facebook event.

Abstract: This paper examines the role of firms’ uncertainty about consumers’ environmental concerns in the emergence of greenwashing (i.e., false or misleading green labels). We consider a signaling model where a firm (either green -using an environmentally friendly production process- or brown -using the conventional dirty technology-) chooses whether to acquire a green label to signal its type to green or brown consumers (either showing a higher or lower valuation for environmentally friend goods, respectively). Uncertainty stems from two sources: the consumer is uninformed about the firm’s type, and the firm is uninformed about the consumer’s type. Hence, the firm can only estimate consumers’ environmental concerns, which affect the purchase of the good. We examine conditions under which information transmission arises in equilibrium, showing that it critically depends on: (i) the proportion of green consumers; (ii) the premium that green consumers assign to the green (environmentally friendly) good, relative to brown consumers; (iii) the labeling cost differential between green and brown firms; and (iv) the penalty (e.g., reputation damage) that firms suffer after practicing greenwashing from green, relative to brown, consumers. We also identify situations in which pooling (uninformative) equilibria promoting greenwashing are sustained. Our findings suggest that improving the firm’s information about the consumer’s type (i.e., moving from bilateral uncertainty to unilateral uncertainty) may prevent labeling from serving as an informative tool. Furthermore, when intermediate prices lead green and brown consumers to purchase the good, an increase in the proportion of green consumers may not promote information transmission. On the contrary, we should expect to observe more greenwashing.