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Harmonization Versus Mutual Recognition of National Eco-labels

By Ville Mälkönen


This paper formalizes a welfare-comparison between two suggestions to correct for the market failures arising from multiple eco-labels in international markets. In an asymmetric information environment, where the goods’ environmental quality is a credence attribute, firms with different labeling standards cannot implement a separating equilibrium through price signaling. The difference between the standards generates an information-rent in the export market increasing the number of labeled firms complying with lower standards. This pro-competitive spillover implies that when labels with different requirements are treated equally on the markets (mutual recognition), the outcome is welfare superior to the case of harmonized labeling standards, insofar as the difference between the standards is relatively small

Topics: Labeling, Environmental-quality uncertainty, duopoly signaling JEL Classi…cation, C72, L15, F18 I am grateful to Erkki Koskela, Markku Ollikainen, Matti Liski and Mikko Leppämäki for valuable comments
Year: 2005
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