Abstract: A supply chain composed of a manufacturer and a recycler with double information asymmetry is discussed. In such a supply chain, the manufacturer acts as principal and the recycler as agent. In this supply chain, as an agent, the recycler makes a part of investment. The objective is to explore an effective incentive mechanism in the manufacturer's perspective. By using game theory, a new model for this problem is developed by modifying the traditional model of incentive mechanism. With this model, analysis is done. It shows that the investment made by the recycler and its recycling efforts positively correlated, or the more the recycler invests, the more recycling enthusiasm of the recycler can be incited. Also, the recycler with greater recycling capability is willing to bear more risk. Thus, in decision making, the manufacturer should take these factors into account.

Key words: adverse selection, moral hazard, principal-agent theory, incentive mechanism