Incentives for the Collection of End-Of-Life Products in Closed-Loop Supply Chains Under Information Asymmetry

Governmental policy instruments have the potential to foster a successful transition from linear to closed-loop supply chains by providing incentives for the collection of end-of-life products in increasing waste streams, especially in the electronics industry. Existing research on the effectiveness of instruments set by the government such as financial penalties or voluntary regulations is limited. We propose a principal-agent model on contracts between a manufacturer (principal) and a third-party collector (agent) under different regulations established by the government to analyze incentive systems and stimulate waste management. In contrast to previous literature, we show that different instrument can bring the desired effects, i.e. meeting required waste collection targets and striving towards circularity in supply chains. Four different instruments are analyzed: (1) a unit tax, (2) a proportional income tax, (3) a penalizing extended producer responsibility scheme, and (4) a voluntary ecolabel scheme with investment into corporate social responsibility measures. These instruments are compared to a status-quo scenario, analyzing the impact of these policies on returned products, manufacturer’s profit and value of information about the collector’s effort. As
there is uncertainty involved in returns and collection efforts, asymmetric information exists which leads to an imbalance undermining the effectiveness of regulations. From analytical and numerical analyses, we obtain the following insights: The performance of instruments (1) and (2) with regards to collection rates and profits lead to the outcome of meeting collection targets; instrument (3) additionally brings higher profits; and instrument (4) impacts collection rates and profits even more positively.