Designing socially optimal rates of tax and rebate structures in directing migration of risk-averse suppliers towards sustainable products

Abstract

ABSTRACT This study offers design of the ‘socially optimal’ rebate and tax structures, corresponding to the maximum expected gain and minimum risk from migration of prospective risk-averse suppliers towards supplying sustainable products. Risk-averse behaviour is caused by small and medium-sized suppliers who are financially constrained from the perspective of a textile company. This study addresses the unexplored but serious issue of suppliers’ willingness-to-pay for renouncing the option of migrating towards sustainable practices under uncertain market conditions for sustainable products, by using a mean-variance utility framework. The analytical model is validated using case-based real data collected from an Indian retailer who works with two types of suppliers in India: one natural fibre supplier and another chemical-based synthetic fibre supplier. Our model helps explain the effects of loss in expected market share and sudden increase in variability in market share for sustainable products respectively on the ‘socially optimal’ rate of tax and rebate. Also, we establish that with rate of tax increases, the ‘socially optimal’ rate of rebate on sustainable product must increase at an increasing rate to induce potential migration of suppliers towards sustainable practices. The implications of our findings on academics and practice are offered.