Information Rents

To understand the structure of the optimal contract it is useful to introduce the concept of information rent.

We saw in section 2.2 that, under complete information, the principal (who has all the bargaining power by assumption) is able to maintain all types of agents at  their  zero  status  quo  utility  level.  Their  respective  utility  levels  U and  U¯*  at the first-best satisfy


Generally this will not be possible anymore under incomplete information, at least when the principal wants both types of agents to be active.

Take any menu of incentive feasible contracts and consider the utility  level  that  a  θ-agent  would  get  by  mimicking  a θ¯-agent.  By  doing  so,  he would get

Even  if  the  θ¯-agent  utility  level  is  reduced  to  its  lowest  utility  level  fixed  at zero,  i.e., ,  the  θ-agent  benefits  from  an  information  rent  Δθq¯ coming from his ability to possibly mimic the less efficient type. So, as long as the principal insists on a positive output for the inefficient type, q¯ > 0, the principal must give up a positive rent to a θ-agent. This information rent is generated by the informational advantage of the agent over the principal. The principal’s problem is to determine the smartest way to give up the rent provided by any given incentive feasible contract.

In  what  follows,  we  use  the  notations  U  = t θq  and  to  denote the respective information rent of each type.

Source: Laffont Jean-Jacques, Martimort David (2002), The Theory of Incentives: The Principal-Agent Model, Princeton University Press.

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