The Effects of Ecolabels and Environmental Regulations on Green Product Development

We seek to understand how and when government should (and should not) intervene to stimulate green product development when competing firms with asymmetric credibilities communicate their environmental performance through ecolabels. To that end, we develop a consumer-driven model of green product development in which two single-product firms compete on the provision of unobservable environmental quality. We explore the implications for society of two mechanisms used to remedy credibility-related consumer discounting of firms' self-declared environmental qualities, namely voluntary external certifications and mandatory regulation, with a view to providing policy insights for government. One notable insight is that the government should intervene if neither firm is sufficiently credible or if consumers undervalue environmental stewardship; otherwise, the government can allow voluntary external certification to steer green product development in place of regulation