Integrating Incentive Contracts and External Financing in Capital-Constrained Green Supply Chains

Upstream small- and medium-sized enterprises (SMEs) in emerging economies often face severe credit constraints. These constraints hinder green transformation by limiting green R&D investment and production capacity. To address this, we develop a Stackelberg-based governance strategy selection framework. We first analyze cost-sharing (CS) and equity-sharing (ES) contracts and then extend them by incorporating external financing, where the retailer’s contractual commitment serves as an operational guarantee. This integration leads to two incentive-financing bundles, namely CS-F and ES-F. Three main findings emerge. First, capital constraints fundamentally shape the feasibility of green supply chain governance by creating a trade-off between green R&D and physical production. Specifically, the CS contract is feasible only within an intermediate capital range, whereas the ES contract is infeasible. Second, the incentive-financing bundles relax capital constraints and expand the feasible governance region. Although all feasible governance strategies promote green R&D investment, the ES-F bundle remains more sensitive to parameter variations. Third, the optimal governance strategy depends primarily on firms’ capital conditions, shifting across CS, CS-F, and ES-F. Notably, a distributive-efficiency paradox emerges: even when the ES-F bundle yields greater total surplus, a higher sharing ratio violates the retailer’s individual rationality and prevents its adoption. We introduce an asymmetric Nash bargaining mechanism to address this paradox. The mechanism determines transfer payments endogenously and restores the efficient governance outcome. Overall, our findings help supply chain managers select appropriate governance strategies based on observable firm-level capital conditions.