Environmental Certification, Consumer Greenness, and Greenwashing

ABSTRACT This paper investigates the welfare effects of imperfect environmental certification and its efficacy as an environmental policy tool within a partially covered product market and price competition among firms. Using a game‐theoretic model, I find that a truth‐revealing certification mechanism – that emerges for a sufficiently precise certification mechanism or high certification fee – can enhance welfare while consistently outperforming a pooling mechanism. While greenwashing cannot benefit the economy in price competition, it may have different implications in quantity competition. The study highlights that a truth‐revealing certification mechanism is crucial for effectively reducing environmental damage, offering valuable insights for policymakers.