Abstract: According to the Extended Producer Responsibility (EPR) rules, a principal-agent relationship involving product supply, marketing, and recycling between a producer and his dealers is formed. By introducing the impact factor which indicates the impact on product sales by used product recycling, a principal-agent incentive contract model with the EPR system is proposed. Based on the model, the manufacturer works out an optimal incentive contract to maximize his expected benefit utility. To reap the optimal incentive benefit provided by the manufacturer, the dealers optimize their levels of selling effort and recycling effort, thus maximize their expected benefit utility.

Key words: EPR system, principal-agent, incentive contract, impact factor