Optimal technology design

Daniel F. Garrett; George Georgiadis; Alex Smolin; Balázs Szentes

doi:10.1016/j.jet.2023.105621

Optimal technology design

Daniel F. Garrett, George Georgiadis^*, Alex Smolin, Balázs Szentes

^*Corresponding author for this work

Strategy

Research output: Contribution to journal › Article › peer-review

2 Scopus citations

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.

Original language	English (US)
Article number	105621
Journal	Journal of Economic Theory
Volume	209
DOIs	https://doi.org/10.1016/j.jet.2023.105621
State	Published - Apr 2023

Funding

We are grateful to our editor Marzena Rostek, three anonymous referees, to Alessandro Bonatti, Florian Ederer, Uli Hege, Harry Di Pei, Luis Rayo, Phil Reny, Dan Spulber, Jean Tirole, as well as to participants at several seminars and conferences for helpful comments. In the initial stages of this project, D. Garrett was based at Toulouse School of Economics, University of Toulouse Capitole. He is grateful for funding from the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation program (grant agreement No. 714147). D. Garrett and A. Smolin are grateful for funding from the French National Research Agency (ANR) under the Investments for the Future (Investissements d'Avenir) program (grant ANR-17-EURE-0010). We are grateful to our editor Marzena Rostek, three anonymous referees, to Alessandro Bonatti, Florian Ederer, Uli Hege, Harry Di Pei, Luis Rayo, Phil Reny, Dan Spulber, Jean Tirole, as well as to participants at several seminars and conferences for helpful comments. In the initial stages of this project, D. Garrett was based at Toulouse School of Economics, University of Toulouse Capitole. He is grateful for funding from the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation program (grant agreement No. 714147 ). D. Garrett and A. Smolin are grateful for funding from the French National Research Agency (ANR) under the Investments for the Future (Investissements d'Avenir) program (grant ANR-17-EURE-0010 ).

Keywords

Contract theory
Limited liability
Moral hazard

ASJC Scopus subject areas

Economics and Econometrics

Access to Document

10.1016/j.jet.2023.105621

Cite this

@article{af528ed1c66147f58d5006701ddad597,

title = "Optimal technology design",

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 = "Contract theory, Limited liability, Moral hazard",

author = "Garrett, {Daniel F.} and George Georgiadis and Alex Smolin and Bal{\'a}zs Szentes",

note = "Funding Information: We are grateful to our editor Marzena Rostek, three anonymous referees, to Alessandro Bonatti, Florian Ederer, Uli Hege, Harry Di Pei, Luis Rayo, Phil Reny, Dan Spulber, Jean Tirole, as well as to participants at several seminars and conferences for helpful comments. In the initial stages of this project, D. Garrett was based at Toulouse School of Economics, University of Toulouse Capitole. He is grateful for funding from the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation program (grant agreement No. 714147). D. Garrett and A. Smolin are grateful for funding from the French National Research Agency (ANR) under the Investments for the Future (Investissements d'Avenir) program (grant ANR-17-EURE-0010). Funding Information: We are grateful to our editor Marzena Rostek, three anonymous referees, to Alessandro Bonatti, Florian Ederer, Uli Hege, Harry Di Pei, Luis Rayo, Phil Reny, Dan Spulber, Jean Tirole, as well as to participants at several seminars and conferences for helpful comments. In the initial stages of this project, D. Garrett was based at Toulouse School of Economics, University of Toulouse Capitole. He is grateful for funding from the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation program (grant agreement No. 714147 ). D. Garrett and A. Smolin are grateful for funding from the French National Research Agency (ANR) under the Investments for the Future (Investissements d'Avenir) program (grant ANR-17-EURE-0010 ). Publisher Copyright: {\textcopyright} 2023 Elsevier Inc.",

year = "2023",

month = apr,

doi = "10.1016/j.jet.2023.105621",

language = "English (US)",

volume = "209",

journal = "Journal of Economic Theory",

issn = "0022-0531",

publisher = "Academic Press Inc.",

}

TY - JOUR

T1 - Optimal technology design

AU - Garrett, Daniel F.

AU - Georgiadis, George

AU - Smolin, Alex

AU - Szentes, Balázs

N1 - Funding Information: We are grateful to our editor Marzena Rostek, three anonymous referees, to Alessandro Bonatti, Florian Ederer, Uli Hege, Harry Di Pei, Luis Rayo, Phil Reny, Dan Spulber, Jean Tirole, as well as to participants at several seminars and conferences for helpful comments. In the initial stages of this project, D. Garrett was based at Toulouse School of Economics, University of Toulouse Capitole. He is grateful for funding from the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation program (grant agreement No. 714147). D. Garrett and A. Smolin are grateful for funding from the French National Research Agency (ANR) under the Investments for the Future (Investissements d'Avenir) program (grant ANR-17-EURE-0010). Funding Information: We are grateful to our editor Marzena Rostek, three anonymous referees, to Alessandro Bonatti, Florian Ederer, Uli Hege, Harry Di Pei, Luis Rayo, Phil Reny, Dan Spulber, Jean Tirole, as well as to participants at several seminars and conferences for helpful comments. In the initial stages of this project, D. Garrett was based at Toulouse School of Economics, University of Toulouse Capitole. He is grateful for funding from the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation program (grant agreement No. 714147 ). D. Garrett and A. Smolin are grateful for funding from the French National Research Agency (ANR) under the Investments for the Future (Investissements d'Avenir) program (grant ANR-17-EURE-0010 ). Publisher Copyright: © 2023 Elsevier Inc.

PY - 2023/4

Y1 - 2023/4

N2 - 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.

AB - 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.

KW - Contract theory

KW - Limited liability

KW - Moral hazard

UR - http://www.scopus.com/inward/record.url?scp=85148676677&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85148676677&partnerID=8YFLogxK

U2 - 10.1016/j.jet.2023.105621

DO - 10.1016/j.jet.2023.105621

M3 - Article

AN - SCOPUS:85148676677

SN - 0022-0531

VL - 209

JO - Journal of Economic Theory

JF - Journal of Economic Theory

M1 - 105621

ER -

Optimal technology design

Abstract

Funding

Keywords

ASJC Scopus subject areas

Access to Document

Other files and links

Fingerprint

Cite this