On signaling and ethical goods

In this paper, we investigate the possibility that a non-ethical firm may disguise itself as ethical in order to take advantage of the consumer’s higher willingness to pay for ethical goods. Using a signaling model `a la Spence, we show that this outcome is indeed possible due to the asymmetric information on the type of goods. We discuss the characteristics of this equilibrium outcome and we argue that it may jeopardize the functioning of the market for ethical goods.

PANNACCIONI – ROSSI On signaling and ethical goods