Nicole Darnell, Hyunjung Ji, and Matthew Potoski, “The Institutional Design of Eco-labels: Sponsorship Signals Rule Strength.” Journal Article

The Institutional Design of Eco-labels: Sponsorship Signals Rule Strength

Nicole Darnall (Arizona State University), Hyunjung Ji (University of Alabama), and Matthew Potoski (University of California, Santa Barbara)

Regulation & Governance 

Abstract

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