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Contract and incentive mechanism in low-carbon R&D cooperation

Kening Liu (School of Economics and Management, Nanjing University of Science and Technology, Nanjing, China and School of Transportation, Ludong University, Yantai, China)
Huaming Song (School of Economics and Management, Nanjing University of Science and Technology, Nanjing, China)

Supply Chain Management

ISSN: 1359-8546

Article publication date: 8 May 2017




This paper focuses on how the producer inspires his cooperative research partner to reduce carbon emission, by developing a menu of incentive contracts both in research and development (R&D) stage and recycling stage.


The proposed mechanism combines the researcher with the producer in a two-staged closed-loop system. Based on the concept that the producer takes the environmental responsibility, this paper designs a dynamically updating contract for the producer to encourage low-carbon efforts. Meanwhile, the producer offers a menu of contracts against the asymmetric information, that is, the R&D partner owns private information on his low-carbon R&D capability. According to incentive mechanism, the researcher decides whether to tell the truth and how much effort she would exert in R&D and recycling stages.


Discriminating between different types of researchers hurts the producer’s profit. But the updated screening contract can inspire researchers to tell the truth and is beneficial in reducing carbon emissions in the two stages. The results give the optimal solutions of the incentive mechanism. The low-type researcher only obtains reservation profit, whereas the high-type is given more to induce the information.


This paper proposes a strategy of updating the contract factors for avoiding adverse selection and moral hazard. Considering the environmental responsibility of waste products, the producer would like to encourage low-carbon designs among the R&D partners in a closed-loop supply chain.



The authors sincerely thank the editor and the anonymous reviewers for their constructive and important comments that significantly improved the paper. The authors also thank Xu Yi at University of Maryland for his comments on earlier version. This research is supported by the Natural Science Foundation of China (Grant No.71172105, No. 71571102 and No. 71472089).


Liu, K. and Song, H. (2017), "Contract and incentive mechanism in low-carbon R&D cooperation", Supply Chain Management, Vol. 22 No. 3, pp. 270-283.



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