Abstract: To solve the low efficiency caused by hiding of the manufacturer's cost and retailer's efforts in a two-echelon supply chain, a virtual-third party was introduced as a selfless principal based on principal agent theory. Firstly, a supply chain coordination model under adverse selection and moral hazard was developed to screen the manufacturer's true cost and make retailer work hard. Secondly, the relationship among the coordination contract parameters was obtained. Finally, main results revealed that the coordination contract could incent the manufacturer to tell the truth, and the retailer cooperated with the low-cost manufacturers to carry out the optimal efforts. Furthermore, a numerical example was used to verify the conclusions.

Key words: adverse selection, moral hazard, supply chain coordination, virtual-third party