Abstract

Socially-responsible (SR) labels (e.g., fair trade, carbon-neutral, etc.) have become ubiquitous in product markets. Corporations use SR labels to advertise their socially responsible behavior and attract SR-concerned consumers. A major challenge with such labeling schemes is the uncertainty regarding the minimum requirements (or standards) necessary to obtain each label. For example, with uncertainty around label standards, consumers might suspect that firms are taking actions to look socially responsible, instead of truly acting socially responsible, and adjust their behavior accordingly. We study the effect of label uncertainty using product market experiments. In a posted-offer market, sellers are randomly assigned a product that either (a) imposes a large negative externality on a third party, or (b) a small negative externality, or (c) no negative externality. We also randomly assign a label standard in each round and sellers must decide whether to label their product (for a cost) as long as the minimum requirement is met. In our uncertainty treatment, buyers observe if a product is labeled or not, but do not know the label standard for that round, whereas in our certainty treatment buyers observe both the label status and the label standard. We find that (a) buyers are willing to pay a higher price for labeled goods under both certainty and uncertainty; (b) buyers are willing to pay the highest difference for a labeled product when the label is perfectly informative of a low externality, (c) sellers with lower-quality products explore the uncertainty to obtain the (low standard) label and charge a higher price; and (d) the total amount of negative externality is lowest when there is no uncertainty about the label standards.

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