Abstract: The double moral hazard problem in a reverse supply chain composed of a manufacturer and a retailer for used product recycling is discussed. To solve this problem, a linear contract is designed by using the principalagent theory and effort elastic coefficient. With this contract, theoretical analysis and numerical simulation are carried out. It is found that the ratio of effort level of the manufacturer to that of the retailer, the ratio of effort efficiency of the manufacturer to that of the retailer, and the ratio of marginal profit of the manufacturer to that of the retailer are equal to each other. Also, the retailers fixed cost increases as the manufacturers effort efficiency and effort cost coefficient increase, while it decreases as the manufacturers output coefficient increases. Thus, manufacturer and retailers effort level should be decided according to the corresponding effort elastic coefficient. When price contract is designed, it should take the effort elastic coefficient, output coefficient, and effort cost factor into full consideration so as to eliminate the impact of double moral hazard.

Key words: double moral hazard, reverse supply chain, incentive contract