Entry Threshold Setting and Incentive Design for Green Order Financing

In the green order financing (GOF), suppliers must first obtain “green certification” from core enterprises before they can secure bank financing to fulfill eco-friendly orders. In practice, core enterprises often face challenges in establishing green certification standards, particularly in setting a reasonable entry threshold for suppliers to access GOF. This paper examines the setting of entry threshold for GOF and proposes incentives to coordinate the GOF system. Specifically, we study a GOF system consisting of a bank, a large retailer, and a capital-constrained supplier. The retailer, acting on behalf of the bank, sets the greenness entry threshold for the supplier to access more preferential GOF, leveraging its informational advantages regarding the supplier's environmental performance. We find that the supplier will opt for GOF only when the entry threshold set by the retailer is below a critical value; otherwise, it will continue using traditional order financing (TOF). In a Stackelberg game with the retailer as the leader, a unique equilibrium emerges between the two sides of the supply chain, under which GOF is implemented, leading to Pareto improvements and enhanced greenness. As another participant in the system, the bank also benefits from providing GOF, provided that it sets a reasonable interest rate—no lower than a certain threshold. If the bank's GOF interest rate falls below this threshold, external government incentives will be necessary. We demonstrate that the government will only refrain from subsidizing the bank if the supplier's cost coefficient of green investment is extremely high while the bank's GOF interest rate is exceedingly low. Otherwise, the government will be willing to provide subsidies (transfer payments) to the bank, resulting in Pareto improvements for all three GOF members and achieving greater social welfare than with TOF. Finally, we conduct numerical studies to validate the findings and extend the analysis to include a new formulation of consumer surplus, a new game sequence, a new subsidy category, and the retailer's pricing decisions, further confirming the robustness of the results.