27 Pages Posted: 4 Dec 2006 Last revised: 13 May 2014
Date Written: September 2008
When consumers are unsure of the exact standard that a quality certificate or label represents, they must infer the difficulty of the standard in part from observing which firms adopt the label. Key results from the certification and disclosure literatures are thereby altered. First, consumers are more suspicious of a label if a firm with a bad reputation adopts it, so certification can be less appealing to bad firms than average firms or good firms. Second, as the number of available labels increases, the informativeness of certification decreases rather than increases. Third, adoption of a label by one firm need not increase pressure on other firms to also adopt it. Instead, a label can be either "legitimitized" or "spoiled" for use by other products depending on whether a product with a favorable or unfavorable reputation is certified first. These problems are mitigated if certification is mandatory or if some standards are "focal", even if standards remain uncertain. The model is applied to eco-labels and is also relevant for nutrition labels, academic journals, club memberships, diplomas, and related environments.
Keywords: Eco-labels, disclosure, certification, persuasion, standards
JEL Classification: L15, L21, D82, Q00
Suggested Citation: Suggested Citation