Fee or tax? Optimal governance mode in sustainable supply chain with consideration of supplier’s effort under extended producer responsibility

Motivated by countries legislation and industrial practice in the field of the sustainable supply chain management, we consider a case where government requires the focal firm to implement the EPR policy, the focal firm encourages the supplier to exert effort to achieve sustainable governance. Specifically, we study the collaboration mechanisms among government’s regulation, focal firm’s incentive, and supplier’s effort level under two governance models: (1) centralized pollution fee model (CPF) in which only focal firm pays for pollution fee to government; (2) decentralized environmental tax (DET) in which focal firm and supplier all pay for environmental tax to improve the environment sustainability. Our results show that, In CPF and DET models, government should set a high tax/fee standards when supplier faces great governance difficulty to encourage supplier to increase the technology investment. In addition, under CPF model, the benefits of supplier and social welfare can reach the optimal levels simultaneously. Additionally, under DET model, the benefit of all supply chain members can achieve the optimal levels simultaneously. Therefore, we find that DET model is better than CPF model in achieving the optimal overall performance of the supply chain, which bears the responsibilities of all related bodies. Moreover, we discuss the sensitivity of several important parameters on decision variables and profit function in the CPF and DET modes. These findings can inform environmental regulation policy and cooperation strategy of sustainable operation management.