Environmentally friendly production and labelling

Firms’ strategic behaviour regarding environmentally friendly practices is modelled using evolutionary game theory and replicator dynamics. We elaborated the choice of technology and labelling practices when firms performed as bounded rational agents and considered revision of their strategies only occasionally. The framework is information asymmetric because the consumers do not observe a firm type directly, but can infer it indirectly through the market price. We explored the technology strategies of eco-labelled firms. We found that there was an interior unstable state which divided the basins of attraction of two exterior stable states, one where all certified firms were polluting, and another where all certified firms were non-polluting. In order to foster adoption of non-polluting technology, the government should introduce more frequent monitoring and higher penalties for non-alignment with eco-label requirements. We also explored adoption of ecolabels when technology is given and we found an interior evolutionary stable state where certified and non-certified polluting firms co-existed. That is, a part of the polluting firms mimicked non-polluting ones by eco-labelling their own products. Finally, we conclude that the government may choose between an improvement in minimum environmental standards or stricter monitoring in order to de-stimulate false eco-labelling of polluting firms.