Sustainable sourcing contracts under supplier capital constraints and information asymmetry

In this study, we analyze the challenges faced by manufacturers in promoting sustainability throughout their supply chains when the supplier is capital-constrained, has private access to production cost information, and must choose between regular and sustainable production. We develop a dyadic supply chain model to determine the optimal advanced payment contract under asymmetric information. Our comparative results reveal that the optimal contract requires manufacturers to balance promoting sustainability, pricing information rent, and avoiding channel efficiency losses. The key factors in achieving this balance are (i) production cost efficiency, and (ii) the switching cost from regular to sustainable production. When the efficient supplier is more sustainably efficient, the mere existence of information asymmetry always leads to a less sustainable supply chain. However, if the efficient supplier is less sustainably efficient, the manufacturer may be better off encouraging the inefficient supplier to use sustainable operations where regular operations were used under full information. This reveals the bright side of information asymmetry regarding supplier sustainability risk. Although information asymmetry typically leads to channel loss, our study shows that it could result in a greener supply chain, albeit with lower profits for the parties involved. Our findings carry significant practical implications. It highlights that managerial strategies increasing consumers’ willingness-to-pay and awareness of sustainable production can mitigate the negative effects of information asymmetry while promoting supply chain sustainability. These levers not only contribute positively to the environment and society but also play a vital role in securing the long-term prosperity of businesses committed to sustainability.