Can asymmetric information undermine the markets for ethical goods? A model of signaling with advertising

In this paper, we investigate the possibility that a non-ethical firm may disguise itself as ethical in order to take advantage of the consumers’ higher willingness to pay for ethical goods. Using a signaling model ` a la Spence, we show that this outcome is pos- sible due to asymmetric information on the type of goods. We discuss the characteris- tics of this equilibrium outcome and we argue that it may jeopardize the functioning of the market for ethical goods. In this analytical framework, we consider the role of certification as a way to prevent such undesired outcome.