The Role of Asymmetric Information in Environmental Policy Settings: Three Applications

Abstract

We present three models of the role of asymmetric information in environmental protection. Chapter one considers the market for a green credence good - a good whose environmental characteristics are not observed by the consumer, even ex post - in the presence of environmentally-conscious consumers. Producers may choose to advertise their products. However, if communication is not regulated it can degenerate into "cheap talk". We explore the scope for credible transmission of environmental information by green producers, and the limits on it. In Chapter two we develop some similar themes in an experimental setting, with the focus again on consumer reactions to producer-provided information on the environmental attributes of goods, and the potential role of government to improve social welfare by manipulating the use of certification. In Chapter three the focus is somewhat different, whilst maintaining the theme of the role of information asymmetries in an environmental policy setting. In the model here a regulator has to decide whether or not to regulate a polluting activity with imperfect information regarding the net benefits of so doing. In making her decision, the regulator can listen to an adviser, who may or may not be biased. We look at how the decision maker can exploit the advisories incentive to build reputation to achieve better decisions. As a whole the thesis further underscores and illustrates the critical role that availability and distribution of information plays in policy making aimed at environmental protection.