Abstract: Abstract: Within the framework of double moral hazard, the design of compensatory contract for collaborative product development in supply chain has been studied. When designing the compensatory contract, the incentive of supplier’s effort and the incentive of manufacture’s own effort are taken into consideration. Through a component technology price, the contracts realize transfer of some product revenue between the manufacture and supplier, share the output; and through a fixed subsidy fee to meet the constraint for supplier’s participation in the development. Result shows that the component technology price in the optimal contract decreases with the supplier’s cost parameter of R&D effort, and the price increases with the manufacture’s cost parameter of R&D effort.

Key words: supply chain, collaborative product development, double moral hazard, compensatory contract