Optimal technology design

Daniel Garrett, George Georgiadis, Alex Smolin and Balázs Szentes

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper considers a moral hazard model with agent limited liability. Prior to interacting with the principal, the agent designs the production technology, which is a specification of his cost of generating each output distribution. After observing the production technology, the principal offers a payment scheme and then the agent chooses a distribution over outputs. We show that there is an optimal design involving only binary distributions (i.e., the cost of any other distribution is prohibitively high), and we characterize the equilibrium technology defined on the binary distributions. Notably, the equilibrium payoff of both players is 1/e.

Keywords: moral hazard; limited liability; contract theory (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2023-04-01
New Economics Papers: this item is included in nep-des and nep-mic
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Published in Journal of Economic Theory, 1, April, 2023, 209. ISSN: 0022-0531

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http://eprints.lse.ac.uk/118115/ Open access version. (application/pdf)

Related works:
Journal Article: Optimal technology design (2023)
Working Paper: Optimal technology design (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118115

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