Exploring moral hazard and adverse selection in the context of greenwashing and organic product consumption

Abstract

Behavior within the thematic of decoupling and environmental sustainability is critical in understanding the dynamics of greenwashing in retail environments. Decoupling, which aims to separate economic growth from environmental degradation, is particularly relevant in the organic product market, where consumer trust and sustainable purchasing behaviors are essential. This study investigates the impact of greenwashing on moral hazard and adverse selection in the context of organic products in Thailand. Greenwashing, the practice of making misleading claims about the environmental benefits of products, creates significant information asymmetry, complicating consumer decision-making and undermining trust in genuinely sustainable products. Utilizing a theoretical framework based on asymmetric information theory, this research examines how greenwashing influences green skepticism, information asymmetry, and subsequent market behaviors. An empirical analysis was conducted using partial least squares structural equation modeling (PLS-SEM) to test the hypotheses with a quota sampling survey of 402 consumers in Thailand who engage in varying levels of organic consumption. The findings reveal that perceived greenwashing for organic products significantly increases green skepticism among consumers. This increased skepticism exacerbates information asymmetry, which in turn, leads to both moral hazard and adverse selection in the market for organic products. Specifically, companies may exploit this information gap by exaggerating their products' sustainability credentials, resulting in consumers making suboptimal purchasing decisions. The study provides robust empirical evidence supporting the hypothesized relationships and highlights the need for stricter regulatory frameworks to combat greenwashing. The theoretical and practical implications of the findings are discussed, offering valuable insights for policymakers, businesses, and researchers aiming to promote transparency and sustainability in the consumer market.