Beyond Pigou: Information disclosure and the green transition of markets

Abstract

Firms do not have to disclose how their products perform in most dimensions related to environmental footprint, and consumers must rely on the information strategically disclosed by firms. We show in a voluntary disclosure model that this system leads to greenwashing: by withholding information, firms using brown practices can exploit a combination of bounded reasoning and optimism to greenwash consumers. This greenwashing creates a "lemons" problem that unravels green production and R&D, leading to environmental market failures even when consumers are environmentally conscious. Mandatory disclosure could prompt major green technological change by restoring the pressure of the demand side on brown production.
"Shed light on a deceptive man, and he will behave as an honest man." -Napoleon Bonaparte

Keywords: Voluntary disclosure, environmental quality, level-k reasoning, motivated beliefs, consumer misperceptions, mandatory disclosure

JEL Classification: D62, D82, D83, L15, Q58