Research Details

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.

Type

Article

Author(s)

Daniel Garrett, George Georgiadis, Alex Smolin, Balazs Szentes

Date Published

2023

Citations

Garrett, Daniel, George Georgiadis, Alex Smolin, and Balazs Szentes. 2023. Optimal Technology Design. Journal of Economic Theory.