The Institutional Design of Ecolabels: Sponsorship Signals Rule Strength

Abstract

Ecolabels are designed to help consumers identify environmentally superior products and services, however, they are not all created equal. Some ecolabels have strong rules that promote environmental improvements, while others have weaker rules that permit free-riding. Since information about ecolabel design and rule strength is typically not readily available at the point of purchase, consumers struggle to differentiate stronger ecolabels from weaker ones. We investigate whether ecolabel sponsorship is a signal that can help consumers distinguish among ecolabels according to the quality of their institutional design. Using data for 189 prominent ecolabels, we find that while most ecolabels have basic rules for environmental performance, monitoring, and conformance, the strength of these rules varies across labels according to sponsoring organization. Independent sponsors have the strongest ecolabel rules, followed by governments. Industry sponsored ecolabels have the weakest rule structures. Taken as a whole, these findings suggest that sponsorship may signal to consumers important information about whether an ecolabel is designed with rules that effectively condition firms to promote environmental performance outcomes.

Keywords: ecolabel, design, ecolabel sponsor, environmental performance standards, monitoring and conformance

JEL Classification: H70, H83, L38, Q56, H11, H41, M14, M38, M48, Q58, Q59, M31, Q01, H57