Abstract: On common adverse selection of supply chain,the agent can only gain basic retained earnings or poor information rents,so the agent can not be incentive enough.The paper analyzes the supply chain,consisting of only one supplier and one retailer,with the control of virtual third-party.The virtual plays the role of centralized control,represents the interests of the supply chain,designs and implements the incentive mechanism to adverse selection.At last,we establish the first best incentive contract,and all parners can gain some rents.

Key words: two-stage supply chain, virtual third-party, adverse selection, incentive model