Bargaining Power and Efficiency in Principal-Agent Relationships

Abstract

Agrarian contracts such as sharecropping are frequently modelled as principal agent relationships. Although it is commonly assumed that the principal has complete freedom to design the contract, the problem formulation in much of the principal agent literature presumes that the sharecropping contract is constrained-Paretoefficient. In the present paper, we consider the implications of a richer specification of the choices available to peasants. In particular, we consider the entire spectrum of possible power differentials in the contracting relationship between landlords and peasants. Our central result is that the agent can exploit information asymmetries to offset the bargaining power of the principal, but that this process is socially costly.