Awards vs. labels : incentivizing investments in environmental quality

Although consumers often care about environmental quality, limited attention impairs consumers' perception of environmental quality. Environmental awards and labels make environmental quality salient and attract consumers' attention. We analyze how awards and labels affect firms' investments in environmental quality and social welfare. We show that, with an award, both firms invest in environmental quality; with a label, only one firm invests. Under awards, investments depend positively on salience. Under labels, investments depend non-monotonically on salience. A welfare-maximizing social planner prefers awards over labels if and only if marginal damage and salience are sufficiently high such that consumers overestimate the environmental quality of the goods.