Information Rent

Information rent is the surplus a high-type consumer retains in a Screening equilibrium because the firm cannot distinguish types. To prevent the high type from mimicking the low-type contract, the firm must leave the high type with at least

i.e. the high type's consumer surplus if it took the low-type bundle. This is the unavoidable cost of unobservable types.

When to use

Compute information rent whenever you solve a second-degree price discrimination or principal-agent problem: it is the gap between the first-best monopoly profit (with observable types) and the second-best profit (with types unobservable). The mechanism designer's only way to reduce it is to distort the low-type bundle downward — but distortion has its own marginal cost $b$, so the optimum stops where marginal-gain $a$ from reduced mimicking equals marginal-loss $b$.