A game-theoretic approach to designing an optimal code of conduct program to promote supplier sustainability in a supply chain.

In recent years, suppliers in developing countries face the challenge of their low technological and knowledge-related capabilities to enhance sustainability. In addition, buying firms cannot optimize the performance of the whole supply chain because the supplier sustainability practices are unobservable to them and to the public. These two challenges lead to the occurrence of several environmental and social scandals. These scandals pose serious economic and reputational consequences to supply chain members, especially buying firms. Given these challenges and using a sequential game-theoretic methodology, our contribution to the literature on supplier sustainability is to address the effects of supplier code of conduct (SCC) programs on different performance indicators of supply chains. Our analyses indicated that (a) an SCC program can mitigate the supply chain performance deficiencies created by the lack of the integrated optimization of the whole supply chain. Moreover, an SCC program can be superior to some common auditing programs initiated by buying firms. (b) In cases that the supplier's capability is low or moderate, an SCC program provides a Pareto improvement in its sustainability level and the buying firm's profit. (c) High consumer awareness threatens the buying firm's survival in the market. Given this threat, an SCC program indirectly enhances the buying firm's potential to survive. (d) Buying firms should lower their suppliers' wholesale prices in exchange for a substantial investment in their suppliers' capabilities, irrespective of whether or not an SCC program is initiated.