The Circularity Paradox in Sustainable Supply Chains: A System Dynamics Framework of Rebound Effects, Value Leakage, and System Constraints

Circular economy practices increasingly shape supply chains through reuse, repair, remanufacturing, recycling, resource recovery, and reverse logistics. However, greater circular activity does not necessarily produce proportional environmental, economic, or social benefits. Additional transportation, sorting, processing, and coordination requirements can erode recovery gains, while efficiency improvements may stimulate rebound demand. This study develops a literature-based qualitative system dynamics framework to explain these interacting mechanisms as the circularity paradox. Peer-reviewed literature and selected secondary evidence from the United States and Bangladesh inform the proposed causal relationships under different institutional and operational conditions. The framework connects circular intervention intensity, reverse flow complexity, recovery efficiency, organizational capability, processing capacity, secondary market absorption, value leakage, rebound demand, and sustainability performance. Three reinforcing and four balancing feedback loops illustrate how circular interventions may generate value creation, capability learning, operational burdens, capacity constraints, market saturation, and rebound effects. Eleven conditional propositions identify potential indicators, boundary conditions, and delayed responses for future empirical testing. Sustainable circular performance is treated as a multidimensional environmental, economic, and social outcome rather than a direct consequence of recovery volume. The framework suggests that sustainability gains depend on aligning circular activity with organizational, processing, and market capabilities.