Efficient Labelling Policies for Credence Goods: Who Should Pay?

We analyse optimal information disclosure policies involving hidden attributes of “credence goods ” when producers can either self-label their products, or have them certified by a third party. The paper develops conditions that determine the optimal imposition of third-party labelling on producer types, and also compares the relative efficiencies of self and third-party labelling schemes. When corrupt producers can cheat affixing spurious labels, we find that mandatory self-labelling schemes, accompanied by random monitoring of the green firms, generally dominates mandatory third-party labelling, unless the “market share effect ” greatly exceeds the “incentive-to-cheat effect” causing regulatory costs to be very high under self-labelling