What drives green innovation? A game theoretic analysis of government subsidy and cooperation contract

Abstract

Green innovation, implemented by enterprises, contributes to sustainable development and environmental protection. However, because of the high cost and high risk of green innovation, enterprises are reluctant to step into green innovation activities in practice. Government subsidies are conducive to promoting green innovation in enterprises. To investigate firms' preferences for green innovation, we consider a three-player game in a supply chain where a government offers subsidies (price, innovation, or both subsidies) to a manufacturer and a retailer, while the latter two players cooperate with each other through contracts (revenue-sharing and cost-sharing contracts). By exploring the impacts of government subsidies and cooperative contracts on the optimal level of green innovation efforts and profits of participants, we find that: (1) for green innovation that leads to increased production costs, the government should subsidize both the retailer and the manufacturer to improve the level of green innovation; (2) the revenue-sharing contract is more effective than the cost-sharing contract under the premise of government subsidies; and (3) the revenue-sharing ratio decreases in production and innovation costs, while the cost-sharing ratio increases in these two costs.