Decarbonizing investment in a supply chain with information asymmetry under innovation uncertainty

Driven by a growing awareness of corporate social responsibility, many firms have started to reduce their carbon footprints by investing in decarbonizing innovation. There are, however, diverse factors within and outside the environment that may deter them from doing so. In this paper, we consider a supply chain wherein a retailer sells products for a supplier who has an opportunity to invest in decarbonizing innovation. On the supply side, the investment may fail to decarbonize products due to the stochastic feature of innovation; on the demand side, the retailer privately knows the true market size since the supplier stays away from the market. In such contexts, we develop models to study whether the supplier will invest in decarbonizing innovation and how would the investment and information asymmetry affect firm profitability and supply chain performance. First, we find that the supplier is profitable to invest only when the probability of innovation success is high enough. Moreover, information asymmetry tends to decrease (increase) the supplier's profit, thus making the investment less (more) likely to happen compared to the symmetric information case with a high (low) market size. Second, we reveal that under information asymmetry a menu of contracts allows the retailer to get information rent, and the decarbonizing investment helps boost the information rent; however, increasing the probability of innovation success may decrease the information rent. Finally, we show that the economic and environmental performance of the supply chain under information asymmetry may not necessarily be lower than under information symmetry. Though the decarbonizing investment can improve the system's economic performance, it becomes environmentally unfriendly under some conditions due to the increased carbon footprint.

Automated summary

This paper investigates the factors and outcomes of decarbonizing investment by firms in a supply chain. The study finds that the supplier is profitable to invest only when the probability of innovation success is high enough. Information asymmetry tends to decrease the supplier's profit, but a menu of contracts allows the retailer to get information rent. The decarbonizing investment helps boost the information rent. The economic and environmental performance of the supply chain may not necessarily be lower under information asymmetry.