Abstract: The investment for cost saving is to improve the efficiency of unit cost. It guarantees that unit cost in each subsequent production process is in the lower level. However, the problems of hold-up and compensation tend to reduce supply chain investment enthusiasm. In order to solve this problem, this paper adopts the Stackelberg game analysis, and researches the incentive contract, respectively, when investments can be observed or not be observed. It can be concluded that the investment is not enough if the retailer invests, and that suppliers to the production investment levels even higher chain optimal investment level if the supplier invests.

Key words: investment, incentive, contract, game theory