Green and guilty: The interplay of environmental quality and greenwashing

We develop a model with environmentally-conscious consumers whose utility depends on their perception of imperfectly observable firms' environmental investments, and consumers differ in their level of sophistication. Firms can engage in greenwashing, i.e, in sending a costly message overstating their level of actual investments. We show that in equilibrium firms engage in greenwashing, and that greenwashing is complement to authentic green investments, rationalizing the available empirical evidence. We also show that both greenwashing and genuine investment decrease when consumers' sophistication increases, and that a two product monopolist induces less (more) greenwashing and actual investments than two single product duopolists when products are substitutes (complements). Our findings imply a novel tradeoff between policies aimed at discouraging greenwashing or at fostering consumers' awareness and the equilibrium level of genuine environmental investments.