Pro-social reputation effects in consumer goods markets Goytom Abraha Kahsay Laura Mørch Andersen Lars Gårn Hansen Department of Food and Resource Economics, University of Copenhagen

Motivation recent studies find that incentives can be counterproductive in settings like charitable giving and volunteering. In this paper we investigate if similar crowding out effects could arise for purchases of everyday consumption products with ‘pro-social’ characteristics such as a ‘fair trade’ or ‘organic’ certification

Prior Lit. Bénabou and Tirole (2006) suggest pro-social behavior like volunteering blood or work is because it sends the signal that the person is a pro-social type. People who value reputation may react to the introduction of incentives by reducing their pro-social behavior. This could explain the crowding out seen in many empirical studies. It has also become clear that consumers of everyday market products are willing to pay for pro-social characteristics such as fair trade, animal welfare and environmental friendliness.

Our contribution We combine a Bénabou and Tirole (2006) reputation-signaling model and a Gorman characteristics model of consumer’s choice between products to formally explain generation of pro-social image We investigate how different types of consumers react to changing prices when reputation is important and we may see perverse reactions to price changes.

Our contribution We then use a unique Danish consumer panel that combines detailed purchase data with questionnaire data allowing us to single out consumers that are concerned about their pro- social image. We find evidence of perverse price reactions within this group while other consumers exhibit ‘normal’ price reactions. Our data also suggest that the proportion of image concerned consumers is substantial.

Basic model Utility: Choice:

Basic model Reputation:

Implication 3: Homogenous reputation concern

Simulation Results: Heterogenous reputation concern

Data 290 households from the GfK-denmark consumerscan panel (weekly observations) Detailed Milk purchase information Detailed attitude questionair Positive and negative news indices over time

Demand Effekts of discounts on organic milk to conventional milk pricelevel Consumers who never buy conventional milk

Probit model 10 liters per week potentially purchased by each hh. P(organic skim) P(organic semi) P(organic mini) P(organic no buy) = a*(kontrols)+b*(price*reputation_type)+ c*(discount*reputation_type) Kontrols:store type, reputation_type,mundloc means Positive and negative news indices over time

Estimated effects of organic discount to conventional price for consumers who never buy conventional (prelim results) Proportion of reputation concerned: 58%

LR tests of signal crowding model and Neo- classical model (prelim results) Proportion of reputation concerned: 58%

Controlling for other explanations: time of purchase/rationing Over the entire periodOver the discount periods Over the entire period Over the non-discounted periods Over the discount periods

Policy simulation Simulation of a uniform subsidy (on the organic brands in the two close subsstitute markets): welfare decreases by 0.92%, Simulation of a differentiated subsidy (subsidizing only the major market) decrease the welfare by 0.44%.

Conclussion Signaling can cause perverse price reactions We find evidence of perverse price reactions within organic milk consumers while other consumers exhibit ‘normal’ price reactions suggesting correlated pro-social and reputation parameters Simulation results indicate that welfare costs of subsidy can be reduced by deviating from a uniform subsidy.