Riding the Green Bandwagon: An Analysis of Green Social Influences on Sustainability Communication

This paper presents a signaling model of eco‐labeling that incorporates social benefits from green consumption through bandwagon effects. A monopoly firm chooses whether to adopt an eco‐label when consumers are uncertain about the firm's environmental type but derive utility from both the intrinsic value of green products and their social desirability. The analysis reveals that the strength of bandwagon effects relative to intrinsic value determines equilibrium outcomes: weak effects support only separating equilibria where green firms truthfully label, while strong effects enable both separating and pooling equilibria, creating opportunities for greenwashing. Paradoxically, higher consumer trust in firm greenness expands opportunities for greenwashing by making pooling equilibria profitable over a wider range of labeling costs. However, pooling equilibria require identical labeling costs for both firm types—even small cost differentials favoring green firms will eliminate greenwashing, providing an empirically testable prediction with implications for certification design. Welfare analysis demonstrates that separating equilibria generates strictly higher consumer surplus and producer surplus simultaneously compared to pooling equilibria, while also mitigating the environmental damage from brown production that occurs under pooling. The model identifies a critical labeling cost threshold above which policies that increase green product value lead to market expansion rather than premium positioning, suggesting that subsidies for green product improvement should be coupled with measures which push labeling costs above this threshold. The model reveals a tension in regulatory approach: markets with strong social effects and high consumer trust require the most stringent certification and monitoring to prevent greenwashing, while those dominated by intrinsic value may function effectively with simpler schemes. The results provide theoretical justification for risk‐based enforcement strategies that intensify monitoring as consumer trust increases and suggest that third‐party certification or targeted subsidies creating cost differentials between firm types can effectively deter greenwashing.