Sustainability labels: A model of monitoring and compliance

This paper reviews trends in ecolabeling and presents a model on the role of product regulation – i.e., quality certification – specifically on monitoring and enforcement, in the presence of information asymmetry and uncertainty about product quality. Building on a previous model on consumers’ trust in regulation, we extend the analysis to endogenous choices on the part of producers. In the model, the equilibrium product price is increasing in the regulation parameter until the threshold value; above the threshold, regulation has no impact on prices. The model offers insights into the role of consumers’ trust in regulation (quality certification) in credence markets, the intensity of controls required in different markets as a function of the cost differential between compliance and cheating and the role of monitoring in the ‘greening’ of markets.