Government subsidy and firm's cost sharing in sustainable agriculture supply chain

Abstract

SummaryThis paper studies an agriculture supply chain consisting of a government, a leading firm and a group of farmers. The government encourages farmers to make sustainable technologies' input by providing cost share or flat payment. The firm procures products from multiple farmers and shares a portion of input costs. The optimal sustainable technologies' input, wholesale price and government subsidy are determined, and the impacts of different parameters on the decisions with the endogenous or exogenous subsidy are analysed. The results show that when competition intensifies to a certain threshold, farmers will not invest in sustainable technologies. When the subsidy is endogenous, the firm will obtain less profit if he shares more costs because the optimal subsidy decreases with the cost‐sharing proportion. When the subsidy is exogenous, the farmers' optimal sustainable technologies' input under the government's cost share is higher, and the firm may obtain more profit with cost sharing if the subsidy is relatively high. The government provides a higher subsidy to motivate farmers to adopt sustainable technologies when the pollution is more environmentally damaging. The government's cost share is superior to flat payment because it alleviates the government's financial burden with the same effect on motivating sustainable technologies' input.