Abstract: Based on game theory and principal-agent theory, how to design quality control contract in the two-echelon supply chain is studied. The producer’s and buyer’s expected profits function model is set up, in which the producer makes investment level decision in production process and decides the product quality prevention level, and the buyer makes quality evaluation decision and decides the product quality inspection level. It the producer has the moral hazard of reducing product quality investment level and it reduces the investment, the buyer will pay for the information rents in order to incentive producer improve investment level. The buyer may have the moral hazard of exaggerating product quality defects. The optimization theory is used to solve the producer's optimal investment level, product quality prevention level, price rebates and the buyer’s optimal quality inspection level and apportionment ratio of external failure cost. Results of a numerical example show that when producer improve the investment level, the product quality prevention level will increase and the buyer’s quality inspection level will decrease. With the improvement of the buyer’s product quality inspection level, the producer’s price rebates will firstly increase and then decrease, the external failure cost undertook by the producer will decrease, and expected profits will increase, the buyer’s expected profits will decrease, and the supply chain’s joint expected profits are inverse U-shaped. The maximum expected profits and contract parameters are solved and the results, demonstrate that the quality control contract model is effective.

Key words: supply chain, quality control, contract design, principal-agent relationship