A Permissioned Blockchain Business Model for Green Sourcing

Abstract

Problem Definition: End-consumers pay substantial price premia for green certified sustainably sourced products. In addition to the cost of sustainable practices themselves, record keeping required to keep track of those practices and auditing by certifying agencies are costly for the supplier. To make matters worse, information problems among supply chain partners -- moral hazard, adverse selection, and hold-up -- hinder both investments in technology and efforts toward green certification. We investigate whether the pairing of a new technology like blockchain with an access-based business model, where users of a technology pay for access rather than make large up-front investments, can alleviate these three information problems. Academic/Practical Relevance: Moral hazard, adverse selection, and hold-up are pervasive information problems in supply chains. We examine whether and how the recent phenomenon of companies setting-up permissioned blockchains can help address all three information problems concurrently for green supply~chains. Methodology: We build a game theoretic model of the interaction between the buyer and the supplier. We extend existing models by explicitly modeling the supplier's operational decisions in an open market as the supplier's outside option rather than assume fixed outside option values. Results: The implementation of blockchain technology allows the buyer to share more of its green premium with the supplier -- lowering moral hazard. By appropriately pricing access, the buyer can induce a separating equilibrium and address the adverse selection problem. By placing the burden of investment in technology with the buyer, an access-based business model also eliminates the hold-up problem. Managerial Implications: Our results show that blockchain technology -- on its own -- cannot alleviate all of the information problems faced by a green supply chain. Large buyers need to pair blockchain technology with an access-based business model to unleash its full potential.