Abstract: Based on the game theory and pr incipal-agent theory, this paper studies the problem of how to signal product quality in supply chain under the conditions of asymmetric information.The supplier makes the decision of production process investment level and determines quality prevention strategy, who may signal the type of the production process investment level to the producer in order to obtain the optimal incentive contract, and then the producer makes the quality appraisal decision and processing decision when it receives the intermediate components.We use the optimal theory to establish producer's quality decision control model and describe the information rents.The simulation results will show that the supplier has incentive to signal the type of production process investment level to the producer, and improve its product quality level.When the producer observes the signal of product quality, it will reduce the quality inspection level, improve the processing level and increase the forward payments, which will be as supplier's quality rewards.Meanwhile the whole supply chain's joint expected prof its will increase, and then the producer will reduce information rents.Finally, we investigate the causes of ratchet effects and provide corresponding quantitative descriptions and proofs respectively.

Key words: supply chain, principal-agent relationship, quality level, signaling game, ratchet effects