The Principal-Agent Relationship with an Informed Principal: The Case of Private Values

The authors analyze the principal-agent relationship when the principal has private information as a three-stage game: contract proposal, acceptance/refusal, and contract execution. They assume that the information does not directly affect the agent's payoff (private values). Equilibrium exists and is generically locally unique. Moreover, it is Pareto optimal for the different types of principal. The principal generically does strictly better than when the agent knows her information. Equilibrium allocations are the Walrasian equilibria of an "economy" where the traders are different types of principal and "exchange" the slack on the agent's individual rationality and incentive compatibility constraints.