Strategy and contract design in supply chain with incomplete information about quality

This paper considers that in a supply chain consisting of the manufacturer and supplier, how would the manufacturer choose the controlling strategy, sharing the external losses or taking them back all by himself, to optimize his own profit and maximize the supply chain´s total revenue under incomplete information compared with a benchmark of the solutions under complete information. If the external loss is shared with the supplier, the contract is effective to induce the supplier to positively improve his own level of quality prevention. And the most important of all, the overall effectiveness of the supply chain is improved at the same time.