WHY AN INFORMED PRINCIPAL MAY LEAVE RENTS TO AN AGENT

This paper characterizes incentive contracts for the situation where a principal is privately informed about the technology governing an age ncy relationship. In contrast to a standard principal-agent relationsh ip, it is shown that a principal who values effort highly will choose to induce effort by paying a high base wage and low bonus payments. Mo reover, the equilibrium contract has the principal transferring rents to the agent even though contracting possibilities are unrestricted an d both principal and agent are risk neutral. Consequently, the informe d-principal framework is shown to provide a rational for the payment o f efficiency wages.