Eco-labels for credence attributes: The case of shade-grown coffee

  • Larson B
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Abstract

Using the case of shade-grown coffee, this paper examines the market impacts of "eco-labels" for credence attributes. First, the Mattoo and Singh (1994) test is conducted for the case of shade-grown coffee to investigate the market impacts of a shade label. This analysis in section 2 shows that a shade label could "pass" the test, but the market impacts are likely to be minor. Section 2 also shows how to use estimates of supply, potential demand, and price elasticities of demand and supply to predict eco-label premiums in the post-label equilibrium. And second, given the importance of consumer demands for eco-label impacts, and since the theoretical foundations of demand for eco-labeled items are not well developed in the literature, Section 3 takes a closer look at the microeconomics of labels and consumer demand. A nested constant-elasticity-of-substitution preference structure is used to derive theoretically consistent Marshallian demands for shade and non-shade coffee. A numerical simulation shows how relative prices and consumer preferences for the credence attribute and variety are both important factors in demand creation of labeled items.

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