The research addresses a genuine gap in the literature on closed-loop supply chains. Remanufacturing has become a cornerstone of the circular economy, adopted by industrial giants such as General Electric, Xerox, HP, IBM, and Caterpillar because it extends product life cycles, cuts production costs, reduces energy consumption, and lowers emissions relative to making new goods. Empirical estimates cited in the paper suggest remanufacturing could reduce carbon emissions by up to ten million tonnes annually in the United Kingdom alone. Yet firms that remanufacture face a distinctive operational headache: the condition of end-of-life products is heterogeneous and unpredictable, which translates into uncertainty in costs, product quality, and market demand. Consumers, in turn, perceive remanufactured goods as riskier purchases than new ones, and behavioral evidence shows that both firms and buyers respond with risk-averse behavior.

Wang and Li built a game-theoretic model in which a manufacturer chooses among three organizational structures for remanufacturing. In the in-house model, the manufacturer produces and prices both new and remanufactured products itself. In the authorization model, it licenses the entire remanufacturing operation to a third-party remanufacturer in exchange for a fee. In the cooperation model, the third party handles remanufacturing production while the manufacturer manages sales and pricing. Crucially, the authors modeled both the manufacturer and the remanufacturer as risk-averse agents using a mean-variance framework, in which each firm maximizes expected profit minus a penalty proportional to profit volatility. Quality uncertainty enters through a zero-mean random shock to consumers’ perceived quality of remanufactured products, with a variance that captures how unpredictable used-product condition really is.

The equilibrium analysis yields a cascade of counterintuitive pricing effects. Under in-house remanufacturing, greater risk aversion or higher quality uncertainty drives the manufacturer to cut the price of remanufactured products as a hedge against volatility, while the new-product price stays untouched because new goods carry no quality risk. Cheaper remanufactured products stimulate their demand, which cannibalizes new-product sales—yet total market output actually expands, a scale-hedging effect the authors document formally. Under authorization, the licensing fee becomes a conduit for risk-shifting: a more risk-averse manufacturer lowers the fee to dampen uncertainty amplification, whereas a more risk-averse third party loses bargaining power, allowing the manufacturer to raise the fee and extract risk-free revenue. When the third party is more than twice as risk-averse as the manufacturer, rising uncertainty pushes licensing fees and new-product prices upward simultaneously.

The pivotal result emerges when the three structures are compared on total utility—the combined welfare of manufacturer and remanufacturer. Under risk neutrality, the in-house model always wins, exactly as textbook supply-chain theory predicts, because centralized decision-making internalizes every margin. But once risk aversion and uncertainty are sufficiently large, the ranking flips: the decentralized authorization or cooperation structures can generate higher total utility than in-house remanufacturing. The mechanism is risk dispersion. In-house remanufacturing concentrates all quality-related risk on a single decision-maker, whose fear of volatility distorts pricing and erodes system-wide welfare. Decentralized structures, by contrast, embed contractual instruments—licensing fees and wholesale prices—that let the third party absorb a share of the risk, cutting the system’s overall risk cost. The authors trace this through a transmission chain running from risk to price to demand to utility, and their numerical simulations across five parameter scenarios confirm the reversal is robust.

Perhaps the most elegant contribution concerns how such decentralized arrangements can be made mutually beneficial. The authors show that a fixed, lump-sum transfer payment from the third-party remanufacturer to the manufacturer—negotiated before quality uncertainty is resolved and independent of realized profits—can induce the manufacturer to voluntarily adopt the superior decentralized structure. Because the payment is fixed ex ante, it redistributes utility without distorting any pricing or operational decision, preserving the efficiency of the equilibrium. The paper characterizes the precise parameter intervals within which such transfers guarantee that both parties do at least as well as under any alternative, achieving a win-win outcome without elaborate profit-sharing contracts. As the manufacturer’s risk aversion intensifies, the optimal structure migrates from in-house remanufacturing toward authorization and, at higher levels, toward cooperation.

The study also maps how ordinary economic parameters reshape the optimal choice. Higher manufacturing costs for new products, greater consumer willingness to pay for remanufactured goods, lower remanufacturing costs, and lower uncertainty all expand the region where in-house remanufacturing remains optimal, because they make internalizing the operation more profitable and weaken the value of external risk-sharing. Conversely, when remanufacturing becomes more attractive to consumers and cheaper to perform, authorization gains ground, letting the manufacturer extract value through licensing while offloading production responsibility. The practical message is that no structure is universally best: managers must continuously reassess cost structures, consumer acceptance, and risk exposure as market conditions evolve.

The policy analysis may prove the most consequential finding for regulators. Wang and Li embedded two widely used environmental instruments into their framework: remanufacturing subsidies and carbon taxes, the latter adopted since the 1990s across Nordic countries and much of the world. The two policies, though both aimed at sustainability, push firms toward fundamentally different organizational forms. A remanufacturing subsidy lowers the effective cost of remanufacturing, strengthening the case for keeping the operation in-house and shrinking the incentive to outsource. A carbon tax, by penalizing the emissions of new-product manufacturing, makes risk exposure more expensive—and the authorization structure turns out to be the most effective vehicle for preserving licensing revenue while shifting operational and demand risk outward. Carbon taxation therefore enlarges the parameter region in which authorization is optimal. In the numerical analysis, the authors calibrated emission coefficients using evidence that remanufactured engines generate roughly eighty percent lower environmental impact than new ones.

For managers, the implications cut against reflexive vertical integration. In stable markets with low uncertainty and risk-averse third parties, internalizing remanufacturing preserves coordination and stabilizes outcomes. But as uncertainty grows or a firm’s own risk aversion deepens, partnering with qualified third-party remanufacturers—through licensing under carbon-tax regimes or cooperation arrangements—can deliver superior welfare while still advancing circular-economy goals. For policymakers, the lesson is subtler still: environmental instruments do not merely change production volumes and prices; they reshape the very architecture of industrial organization. Designing regulation without accounting for firms’ risk preferences risks steering the remanufacturing sector toward structures that neither firms nor society intended.

The authors acknowledge limitations that chart future work. Their model captures quality-related demand uncertainty but not stochastic product returns or heterogeneous core quality; it relies on mean-variance preferences rather than alternative risk measures such as conditional value-at-risk; and it does not directly quantify standalone environmental metrics like emission levels across structures. Extending the framework to profit-sharing and risk-contingent contracts, and to settings where equilibria fail to exist, remains open. Even so, the core message stands as a rare piece of good news for the circular economy: sharing the risk of remanufacturing, it turns out, can be better than shouldering it alone.

Subject of Research: Optimal choice of remanufacturing organizational structure for risk-averse manufacturers under quality uncertainty and environmental regulation

Article Title: Sustainable remanufacturing structure choice under risk aversion: the role of environmental regulation and uncertainty

Article References: Wang, J., & Li, W. (2026). Sustainable remanufacturing structure choice under risk aversion: the role of environmental regulation and uncertainty. Results in Engineering, 32, Article 113223. https://doi.org/10.1016/j.rineng.2026.113223

Image Credits: AI Generated

DOI: 10.1016/j.rineng.2026.113223

Keywords: remanufacturing, circular economy, risk aversion, supply chain, carbon tax, environmental subsidy, third-party remanufacturers, quality uncertainty, game theory, mean-variance model, closed-loop supply chain, sustainability