Auditing a supply chain with environmental regulations: a game theory approach

Abstract

ABSTRACT The seriousness of climate change’s impact on people’s lives has compelled policymakers to create rules for businesses, aiming to limit their impact on the environment. Some companies decide to take the risk of breaking these rules instead of spending resources to follow them. In this study, we investigate the decision-making challenge that arises when a company interacts with a recycler. We expand the original model by including a second recycler. The company can decide to audit the recyclers or skip the audit and save resources. The recyclers can choose whether to follow environmental rules or not. The company wants to minimise costs, while the recyclers aim to maximise profits from recycling. We use game theory to represent how the company and the recyclers interact. The study’s findings reveal that adding the second recycler decreases the willingness of the first recycler to take risks and break environmental regulations.