WP-037: Sébastien Houde "Bunching with the Stars: How Firms Respond to Environmental Certification" (July 2018)
This paper shows that firms respond strategically to ENERGY STAR, a voluntary certification program for energy-efficient products. Firms offer products that bunch at the certification requirement, differentiate certified products in energy and non-energy dimensions, and charge a price premium on certified products. In the US refrigerator market, the magnitude of the price premium corresponds exactly to the average willingness to pay consumers have for certified products. This suggests that firms have the ability to extract most of the consumer surplus associated with certified products. If firms had to pay a fee to use the certification, a policy recently suggested, most of the cost should then be borne by consumers. I illustrate how such a policy would impact the adoption of energy-efficient appliances.