Optimal technology design

Daniel F. Garrett, George Georgiadis, Alex Smolin and Balazs Szentes
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Daniel F. Garrett: UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse
George Georgiadis: Northwestern University [Evanston]
Balazs Szentes: University of London [London]

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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)
Date: 2023-04
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Citations: View citations in EconPapers (2)

Published in Journal of Economic Theory, 2023, 209, pp.105621. ⟨10.1016/j.jet.2023.105621⟩

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Journal Article: Optimal technology design (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04224372

DOI: 10.1016/j.jet.2023.105621

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