Is green optimism good for the environment but bad for firms?—A study on green optimism in a supply chain

With a growing number of consumers expressing their preferences for environment-friendly products, it has become a critical agenda for businesses to address environment and sustainability issues. However, there exists a discrepancy between consumers’ stated preferences and their actual purchasing behaviors. Accordingly, firms may overestimate market demand from environmentally conscious consumers, leading to ‘green optimism’ bias. We develop a stylized model to investigate how a manufacturer’s green optimism influences firms’ green investments and subsequent profits in a supply chain comprising a manufacturer and a retailer, both of whom can invest in greening. We consider two scenarios based on the leadership in the supply chain: retailer-led and manufacturer-led. Conventional wisdom suggests that optimism regarding the environmental demand could motivate firms to increase green investment but may harm profits due to biased decisions. Surprisingly, however, our analysis reveals that within a supply chain context, manufacturer’s green optimism may discourage green investment of the optimistic manufacturer and also the retailer. Moreover, green optimism bias may increase the profit of the optimistic manufacturer and lead to a win–win situation in a supply chain. We characterize the conditions under which such counter-intuitive results occur and explain the underlying mechanisms. In doing so, we also identify two distinct roles played by a retailer, ‘bias-reducing’ and ‘bias-intensifying’, depending on the supply chain leadership.