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Research Details
Optimal Technology Design, Journal of Economic Theory
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.