Abstract: Selling ability and effort of sales agent are always the agent’s private information when the firm sells a single product through the agent.Selling ability will determine the effectiveness of the agents’ selling efforts.In this paper, the firm needs to design incentive contracts for the agent and decide appropriate price for the product in two periods.In the model, the firm adopts long term contracts and can select two contract strategies, i.e.separating and pooling in the first period.By developing two principle-agent models, the optimal decisions for the firm in either strategy for two periods are investigated.Although the optimal contract strategy for the firm in single period is separating under asymmetric information, for two period long-term contracts, the optimal contract strategy in the first period may be separating or pooling, which depends on the discount factor.And the optimal two periods’ price is higher than the price in single period with pooling contract and is lower than the price in single period with separating contracts.

Key words: asymmetric information, incentive contracts, selling ability, sales effort