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) |
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Article number | 105621 |
Journal | Journal of Economic Theory |
Volume | 209 |
DOIs | |
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