Corporate Social Responsibility (CSR) Issues in Supply Chain Competition: Should Greenwashing Be Regulated?

Corporate social responsibility (CSR) has been treated as an instrument to differentiate firms in a competitive market. However, due to the credence good nature of CSR, when considering product quality dimension, firms can only signal their quality through advertising or labeling. These signaling mechanisms may be exploited by some dishonest firms who claim to be green (“greenwashing”). Many critics argue that greenwashing needs to be regulated because it deceives the market and discourages firms from going genuinely green. In this article, instead of focusing on the ethical side of this issue, we try to explore the market outcome from an economic perspective. We show that regulating greenwashing may not necessarily increase the positive environmental externality of green products. In particular, even if greenwashing is regulated, firms may not act green when the additional CSR cost is too high or when the corresponding CSR issue is not as important. On the other hand, we find that allowing greenwashing may incentivize some firms to go genuinely green as long as there are some informed customers in the market.