Impact of External Assistance Programs on Supply Chain Energy Efficiency: A Behavioral Investigation

Abstract

Problem Definition: We take a behavioral perspective to examine the two-stage energy efficiency (EE) investment decision process that many small-and-medium-sized manufacturers (SMMs) face and the potential benefit that external assistance programs provide in both increasing the propensity to take on an assessment and choosing an appropriate EE investment level. Academic/Practical Relevance: A significant portion of energy efficiency improvement opportunities remain dormant at SMMs. External assistance programs are designed to help encourage SMMs to overcome the initial assessment hurdle. However, it is unclear if the source of such programs, whether offered by a downstream buyer or a third-party organization, results in different behavioral outcomes. This study provides insights for policymakers looking to design more effective external assistance programs. Methodology: We use analytical models and behavioral theory to develop a set of hypotheses concerning the impact of two types of external assistance programs. These hypotheses are further informed and tested through three sets of human experiments using participants from MTurk. Results: We confirm the anecdotal observation that, without any external intervention, a significant portion of profitable assessments remains dormant. Although third-party or buyer-offer assessment assistance programs perform equally well in increasing the propensity to conduct a profitable assessment, a buyer-offer program appears to be more efficient as it results in a higher portion of self-financed assessment, i.e., less free-riding. In the investment stage, we observed that investments are not influenced by the assessment cost. However, SMMs who self-finances or uses third-party assistance are prone to apply the representative heuristic and so, tend to under-invest (over-invest) when the assessment reveals highly (less) profitable EE opportunities. A buyer-offered assistance program could, interestingly, alleviate this behavioral bias, leading to investments that align better with the expected profit maximizing levels. Managerial Implications: Our results suggest that it can be more cost-efficient and effective for third-party organizations to collaborate with buyers in providing assistance and managing information instead of providing free assessments directly to SMMs, which is often the case in practice. This is because a buyer-offered assistance program could achieve the same supply chain EE results without having to inject extra cash to cover the assessment cost.