Water as collateral, water as risk: Impact of environmental disruption and intangible risk on water right financing

Water supply is critical for industrial production and daily life, yet small and medium-sized suppliers often face liquidity constraints that limit production. Water right financing has emerged as an innovative mechanism that allows suppliers to pledge water right as collateral to obtain bank loans. Due to the tradable nature of water right, this scheme introduces intangible risk arising from imperfect observability and enforceability of pledged right. To examine the effectiveness of this scheme, we consider a pull supply chain in which a capital-constrained supplier produces to meet stochastic demand through a retailer. The supplier can either rely on advance payment from the retailer or adopt water right financing from a bank. Our game-theoretical analysis shows that while both schemes fully provide liquidity to the supplier, the equilibrium production quantity is smaller under water right financing because financial frictions arise from environmental disruption and intangible risk. To prevent further production reduction, the retailer raises the wholesale price to ensure stable water delivery. Consequently, the supplier achieves higher profits under water right financing when environmental disruption intensity is moderate and intangible risk is limited, as the higher wholesale price increases revenue despite the constrained production. Water right financing reduces financial sustainability due to higher supplier default risks, whereas environmental sustainability improves through lower full lifecycle impacts per unit and reduced one-time processing burdens for unsold products. These findings suggest that water right financing can enhance supplier profit while maintaining both financial and environmental sustainability when water right related risks are controlled. To promote firm involvement, socio-economic planners are suggested to implement a bounded subsidy policy that encourages water right financing while preserving sustainability.