Government Subsidy Mechanisms for Addressing Supplier Noncompliance in Emission Reduction

Abstract

This study models a sequential game among a government, a focal firm, and a supplier that may underinvest in compliant emission reduction. It compares a direct subsidy to the supplier with an indirect subsidy to the focal firm for supplier support. Direct subsidies correct supplier underinvestment; focal firms also support suppliers when demand is positive, but choose less support than is socially optimal. The choice of subsidy recipient depends on the focal firm's support cost. When the support cost is low, the indirect subsidy dominates in both compliance level and social welfare. When the support cost is high, the direct subsidy dominates in both dimensions. At an intermediate support cost, the direct subsidy generates a higher compliance level, whereas the indirect subsidy yields greater social welfare. Therefore, the government should select the subsidy recipient according to its policy objective and the focal firm's actual support efficiency.