Buyer direct financing with blockchain‐assisted due diligence in supply chain

Abstract

AbstractCapital constraints are one of the major challenges for the supplier to invest in activities to enhance environmental and social responsibility (ESR) in production. Responsible buyer direct financing has emerged as an important solution to motivate supplier ESR by pegging the interest rate to the supplier's ESR level. Motivated by real practices, we develop game‐theoretical models to explore the value of conducting blockchain‐assisted due diligence to inspect the borrowing supplier's ESR qualification in a two‐tier supply chain structure where the downstream buyer directly finances the capital‐constrained supplier. Conventional wisdom tells us that driving greater supplier transparency (e.g., conducting blockchain‐assisted due diligence) will motivate the supplier to strengthen environmental and social compliance. However, we identify the necessary and sufficient “backfiring condition” under which the blockchain‐assisted due diligence may “backfire” by reducing the supplier's ESR efforts. The supplier devotes more ESR efforts if and only if the due diligence cost is sufficiently high. Our result implies that the heavy cost of adopting blockchain technology is not necessarily bad from the responsibility perspective as long as the backfiring condition does not hold. Moreover, we identify the Pareto zone in which conducting blockchain‐assisted due diligence could benefit both supply chain members. We extend our model by examining the impact of a shift from profit orientation to social welfare orientation. Our findings provide managerial insights into the implementation of blockchain‐assisted due diligence to enhance supplier ESR and improve supply chain members’ profits.