Competing or Complementary Labels? Estimating Spillovers in Chinese Green Building Certification

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Many markets have multiple voluntary certification programs that sellers use to signal product or organizational quality. While previous scholarship has emphasized the potential for competition between labels, what happens when labels are viewed as complementary?
In a new journal article published in the Strategic Management Journal, Xia Li and Timothy Simcoe argue there can be positive spillovers in the adoption of “competing” certifications and propose a framework for understanding how such spillovers arise through three channels: suppliers, adopters and users of various labels. In the article, Li and Simcoe create an empirical framework to measure spillovers from the adoption of the Chinese Green Building Evaluation Label (GBEL) to the adoption of the alternative LEED standard within the same city.
Main findings:
  • If labels are complements at the market level, then policies that encourage adoption of one program can attract participants to the other; if they are substitutes, the same policies may be viewed as “picking winners.”
    • The theoretical framework used in the study deduces that labels can be function as complements and can be used together.
  • The diffusion of one voluntary certification program can produce positive spillovers that encourage the adoption of related labels.
    • Doubling the rate of GBEL led to a 20 percent increase in LEED adoption.
  • The positive spillover effect is driven by market-level factors that operate through the “supplier” and the “user” channels.
  • Government incentives to adopt a particular standard can encourage the adoption of related certification programs that share common objectives or inputs.

Li and Simcoe’s study has implications for both management and policy. Managers of standard-setting organizations and building developers may benefit from using the spillover framework as a roadmap for attracting various stakeholder groups. The results also suggest that market-level complementarities can promote the co-existence of multiple labels, indicating to managers that the risks of tipping towards a single standard are lower in practice than the literature on standards adoption predicts.

For policymakers, this study highlights how government incentives to adopt a particular standard – particularly in the early stages of the diffusion process – can work through various channels to encourage adoption of related certification programs that share common objectives or inputs. This policy multiplier effect merits further research, but also suggests that regulators consider subsidizing shared inputs directly as a method of promoting the adoption of multiple certification programs without “picking winners.”

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