Optimal contracting with private knowledge of wealth and ability

We examine the optimal design of contracts when an agent is privately infor med about his wealth, his ability, and his effort supply. We find that the agent's wealth and ability act as perfect complements in determining the po wer of the incentive scheme under which he operates. Only if his ability an d his wealth both increase can an agent be assured of operating under a mor e powerful scheme. Consequently, severe under-utilization of wealth and abi lity arise in equilibrium.