Certification and socially ethical production

Alexander W. Cappelen, Tone Ognedal

Photo: Springer

Photo: Springer

Published in:

Economics of Governance, Forthcoming, available online 11 August 2016

 

Link to the paper

 

Abstract:

In many markets, consumers are unable to distinguish between goods that are produced in a socially responsible way and goods that are not. In such situations, socially responsible production is not a profit-maximizing strategy, even if the premium that consumers are willing to pay exceeds the costs. Only firms that are genuinely motivated by social responsibility would then produce in this way, and there would be too little socially responsible production. Improved opportunities for voluntary certification could potentially reduce this problem by allowing firms to signal their type. We examine how the possibility of certification affects the share of socially responsible production. Our main result is that increased certification may reduce the share of socially responsible production by reducing prices in the market for uncertified products and thus crowd out socially responsible producers who do not certify. This provide a mechanism through which certification might have adverse effects on socially responsible production, even when the certification process is perfect and when there is perfect competition among the producers.

Published Sep. 11, 2016 3:21 PM - Last modified Sep. 11, 2016 3:21 PM