Adopting Environmental Measures in the Supply Chain: The Effect of Market Dynamics and Asymmetry of Information

This research examines market dynamics in the form of relationships among commodities, substitutes or complements, and their ability to incentivize the adoption of pro-environmental measures. The study focuses on firms in different countries competing either locally or globally. Understanding the behavior arising from such relations would enhance our estimation of the importance of environmental policy's differences with respect to market dynamics. For instance, when their competitor is confronted with cost-increasing stricter regulations, a substitute's reaction could indicate a marked preference for greener production through adopting more measures rather than benefiting from being an option with lower cost. The strategic interactions studied relate to supply chain outsourcing behavior, which currently dominates foreign direct investment from developed to developing countries. This research is conducted using econometric models to study survey data of firms adopting measures in their supply chain to reduce their environmental impact. The result is analyzed considering organizational behavior theories and sociocognitive dynamics that could explain the tendency to adopt such measures. The findings include the similarity of adoption behavior in some industries more than others regardless of regulatory differences. The second part of the research utilizes some of the empirical section's insights to build a game-theoretical framework tackling the underinvestment behavior among complements' producers. The model showcases how discrepancies in organizational learning and asymmetry of information in a market could counter pessimism regarding consumer willingness to pay for green products. Coercive methods, including financial support, can create a long-term advantage if presented by an upstream producer, which the market agrees on its superior market information. As a result, inter-firm signaling could yield higher sustainable investment than sharing information.