Government intervention in environmental performance considering working capital issues: Control the supplier or the buyer?

Abstract

We investigate government intervention in the supply chains’ environmental performance considering trade credit and working capital issues. Combining trade credit issues and incorporating an incentive and penalty system based on government assessment standards as in practice, we build three government intervention models: no intervention, direct intervention through the supplier responsible for the environmental performance of a green product, and indirect intervention through incentives for the buyer. The analytical investigations and numerical analyses show that government interventions (direct and indirect) always outperform no intervention in terms of environmental performance, market performance, consumer surplus, and social welfare. Also, direct and indirect government interventions contribute identically to performance improvements. However, direct intervention in the supplier induces the buyer's payment term extension, while indirect intervention through the buyer shortens the payment term. Therefore, the interaction between the government's and the buyer's decisions determines each player's profit performance depending on the government's choice of assessment standard for environmental performance. By investigating the range of assessment standards, we find that indirect intervention through the buyer is the more suitable intervention option with firms’ voluntary compliance and lower government expenses.