Strategic Subsidy Design for Mitigating Quality Misreporting in Electric Vehicle Battery Recycling

Abstract

As the global stockpile of end-of-life electric vehicle batteries grows, subsidies have become a primary policy tool to stimulate recycling. However, recyclers can exploit private information about a battery’s State of Health to inflate quality claims and obtain excessive subsidies. This paper develops a Stackelberg game model encompassing a manufacturer and a recycler under three policy scenarios—no subsidy, subsidizing the manufacturer, and subsidizing the recycler—and extends the analysis to a hybrid subsidy scheme that optimally allocates a fixed subsidy budget between the two parties. The results deliver three explicit findings. First, subsidies exhibit a dual effect: while incentivizing recycling, excessively high subsidy levels can instead induce recycler misreporting and fail to improve environmental benefits, particularly for batteries with high reusable value. Second, the expected net value of recycled batteries is a pivotal parameter. When it is high, Pareto improvements for both supply chain members are achieved even with minimal subsidies, regardless of the subsidy recipient. Third, the proposed hybrid subsidy scheme, with an optimally derived allocation ratio, aligns the incentives of the manufacturer and the recycler, mitigates misreporting risk, and coordinates the supply chain more effectively than static, one-size-fits-all policies. The contribution of this study is twofold: it characterizes how subsidy allocation interacts with recycler misreporting in a battery recycling supply chain, and it provides policymakers with actionable guidance for designing differentiated and robust subsidy contracts that advance a sustainable battery ecosystem.