Auditing and training to incentivize sustainability in multi-tier supply chains: Substitutes or complements?

Governments and consumers increasingly hold companies responsible for sustainability violations across their supply chain. However, companies often have only limited information on sustainability practices in their upstream supply chain. To still achieve sustainable behavior of lower-tier suppliers, they have to choose adequate incentives or delegate this responsibility to their direct suppliers. We analyze a three-tier supply chain where a buyer and a direct supplier can motivate sustainable behavior of a sub-supplier by auditing or investing in training. Auditing and training are substitutable for the buyer in a two-tier supply chain but can become complementary when being able to delegate the incentive effort to the direct supplier. As the external investigation level increases, the buyer and the direct supplier do not necessarily switch to training, but may rely more on auditing. Such increasing external investigations, just as higher penalties, can reduce the sustainability effort through the option of delegating the incentive effort to the direct supplier. Likewise, combining both mechanisms can also incentivize a lower sustainability effort.