The Incidence of Coarse Certification: Evidence from the Energy Star Program

CER-ETH – Center of Economic Research at ETH Zurich, Working Paper 18/290, May 2018

66 Pages Posted: 14 Jun 2018

Date Written: May 22, 2018

Abstract

A coarse certification provides simple, but incomplete information about quality. Its main rationale is to help consumers trade off dimensions of quality that are complex and lack salience. In imperfectly competitive markets, it may induce excess bunching at the certification requirement, crowd out high quality, and facilitate price discrimination. Who will ultimately benefit from a coarse certification thus depends on the degree of market power firms can exercise as well as on consumers’ sophistication in responding to such information. This paper illustrates these insights using the ENERGY STAR certification program as a case study. I investigate the incidence of the program with a structural econometric model of the U.S. appliance market. I find that the certification can crowd out energy efficiency, make consumers worst off, and have small, but heterogenous impacts on firms’ profits. In this context, the certification tends to not be welfare-improving. This conclusion, however, crucially depends on the market environment and the design of the policy - in scenarios where energy prices are low, or the certification requirement is very stringent, the ES program can be welfare-improving.

Keywords: coarse certification, consumer attention, differentiated markets, structural estimation, energy efficiency

JEL Classification: D43, L13, L15, L68, Q48

Suggested Citation

Houde, Sébastien, The Incidence of Coarse Certification: Evidence from the Energy Star Program (May 22, 2018). CER-ETH – Center of Economic Research at ETH Zurich, Working Paper 18/290, May 2018 , Available at SSRN: https://ssrn.com/abstract=3186492 or http://dx.doi.org/10.2139/ssrn.3186492

Sébastien Houde (Contact Author)

ETH Zurich ( email )

Zurich
Switzerland

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