Optimal technology design

Garrett, Daniel, Georgiadis, George, Smolin, Alex and Szentes, Balázs (2023) Optimal technology design. Journal of Economic Theory, 209. ISSN 0022-0531

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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.

Item Type:	Article
Official URL:	https://www.sciencedirect.com/journal/journal-of-e...
Additional Information:	© 2023 Elsevier Inc
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
Date Deposited:	06 Feb 2023 16:33
Last Modified:	18 Nov 2024 18:27
URI:	http://eprints.lse.ac.uk/id/eprint/118115

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