Motivating Suppliers' Sustainability Performance via Investments in Pollution Abatement Innovations

Working Paper, University of Washington - Foster School of Business

38 Pages Posted: 4 Jan 2016 Last revised: 16 Jan 2016

See all articles by Shi Chen

Shi Chen

University of Washington - Foster School of Business

Qinqin Zhang

Microsoft Corporation

Warren H. Hausman

Stanford Graduate School of Business

Date Written: January 2, 2016

Abstract

We consider the actions of two suppliers investing in pollution abatement innovations and also choosing end-of-pipe pollution reduction levels when the buyer chooses different sourcing strategies. To encourage improvements in environmental performance of suppliers in emerging economies, the buyer either sources from both suppliers and allocates more market share to the one with better environmental performance, or sources from only one supplier and gives the one with better environmental performance a higher chance of winning the contract. We consider two dimensions of a buyer's choices: the sourcing strategy (single vs. dual sourcing) and the order allocation mechanism (either linear or proportional). Through equilibrium analysis of this stylized model, we study whether the action of one supplier on investing in pollution abatement will always improve both suppliers' end-of-pipe pollution reduction levels under the various scenarios described. We examine which sourcing strategy encourages more supplier investment in pollution abatement and which strategy results in a higher total production reduction level for the entire supply chain. We also study the buyer's optimal choices of contract terms (the wholesale price and the order adjustment parameter of the order allocation mechanism) to balance her economic objective with her sustainability objective.

Keywords: Supply Chain Sustainability, Pollution Abatement, Sourcing Strategies, Order Allocation

Suggested Citation

Chen, Shi and Zhang, Qinqin and Hausman, Warren H., Motivating Suppliers' Sustainability Performance via Investments in Pollution Abatement Innovations (January 2, 2016). Working Paper, University of Washington - Foster School of Business, Available at SSRN: https://ssrn.com/abstract=2710253 or http://dx.doi.org/10.2139/ssrn.2710253

Shi Chen (Contact Author)

University of Washington - Foster School of Business ( email )

Michael G. Foster School of Business
University of Washington
Seattle, WA 98195-3200
United States

Qinqin Zhang

Microsoft Corporation ( email )

One Microsoft Way
Redmond, WA 98052
United States

Warren H. Hausman

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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