Green business and blue angels - A model of voluntary overcompliance with asymmetric information

This paper presents a model of a monopolist's voluntary overcompliance with legal environmental standards under asymmetric information about the firm' s environmental impacts. The key assumptions are: the existence of quality premia for environmental soundness, a positive but imperfect degree of moni toring, and adaptive consumer expectations. Conditions necessary for overco mpliance to arise in a profit-maximizing equilibrium are derived. The effec ts of a third-party eco-labeling system are analyzed. It is shown that the existence of an independent labeling authority increases the likelihood of overcompliance to be profit-maximizing. Moreover, firms might have an incen tive to lobby for the introduction of such a system. The effect of consumer s' risk preferences and an instrument for preventing "Greenwash'' (companie s lying about their environmental performance) is also discussed.