The Principal-Agent Relationship with an Informed Principal, II: Common Values

A principal has private information that directly affects her agent's payoff (i.e., "common values" obtains). The authors analyze their relationship as a three-stage game: (1) the principal proposes a contract; (2) the agent accepts or rejects; and (3) the contract is executed. They show that the equilibrium outcomes are the allocations that weakly Pareto dominate the allocation maximizing the payoff of each "type" of the principal within the class of incentive-compatible allocations ensuring the agent his reservation utility irrespective of his beliefs about the principal's type. The authors also characterize the equilibria that are immune to renegotiation. Copyright 1992 by The Econometric Society.