Abstract
Law and enforcement play a crucial role in addressing the issue of firms falsely signaling the environmental performance of their products. Greenwashing, governed by truth-in-advertising laws designed to prevent misleading claims, remains a significant challenge. Despite regulatory measures, the difficulty and scarcity of detecting greenwashing make it a noteworthy concern. In this project, we build on the Beckerian approach in which the probability of detection and the fine size are considered by firms, which then (mis)act accordingly. Going beyond mere enforcement dynamics, our framework integrates a signaling model, refining firm actions based on consumer beliefs and vice versa. Through a laboratory experiment involving real commodities and actual purchasing decisions, we test partial equilibria for both sellers and buyers. Different treatments manipulate the probability of detection altering a priori incentives to greenwash, and consequently, consumer’s beliefs are expected to adjust.