A Theory of Multi-Tier Ecolabels

Abstract

Certification schemes for credence goods can be binary in structure or have multiple tiers. We present a theory explaining how standard-setting organizations choose between these two forms, and compare the differing incentives of industry trade associations and non-governmental organizations (NGOs) in setting standards. For either type of scheme in autarky, the choice between a binary and a multi-tier label depends upon industry structure in subtle ways. When the two types of organization compete, however, there exists a unique equilibrium in which each organization offers a binary label. Surprisingly, the trade association offers a more stringent label than the NGO. In effect, the NGO sets a minimum quality standard that reduces the excessive product differentiation desired by the industry.