Optimal technology design

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

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 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 languageEnglish (US)
Article number105621
JournalJournal of Economic Theory
Volume209
DOIs
StatePublished - Apr 2023

Keywords

  • Contract theory
  • Limited liability
  • Moral hazard

ASJC Scopus subject areas

  • Economics and Econometrics

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