External Intervention or Internal Coordination? Incentives to Promote Sustainable Development through Green Supply Chains

To encourage firms to engage in green production, two different types of investment funding, namely external funds from agencies outside the supply chain (e.g., government subsidy), and internal funds from supply chain partners (e.g., greening cost-sharing with the retailer), are investigated in this paper. Based on game theory, the decision-making behavior and profits of a competitive supply chain consisting of a green manufacturer, a regular manufacturer, and a retailer are analyzed under both funding schemes. The results show that while both government subsidy and greening cost-sharing contract can achieve the goals of increasing a product’s degree of greenness and increasing the sales of green products, there are differences between these two methods in reaching these goals. Further, both via theoretical and numerical analysis, we find that although both the green manufacturer and the retailer can greatly benefit from government subsidy and greening cost-sharing contract, they may have different preferences regarding these two methods, which are mainly related to the size of the government subsidy, the fraction of greening cost-sharing with the retailer, the Research and Development (R&D) cost coefficient, the greenness sensitivity coefficient, and price sensitivity coefficient. Finally, the supply chain members’ behaviors (including the production and pricing decisions and, the choice of funds investment) are largely affected by the government subsidy mechanism.