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Optimal technology design

Author

Listed:
  • Daniel F. Garrett

    (UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse)

  • George Georgiadis

    (Northwestern University [Evanston])

  • Alexey Smolin

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse)

  • Balazs Szentes

    (University of London [London])

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.

Suggested Citation

  • Daniel F. Garrett & George Georgiadis & Alexey Smolin & Balazs Szentes, 2023. "Optimal technology design," Post-Print hal-04224372, HAL.
    • Handle: RePEc:hal:journl:hal-04224372
    DOI: 10.1016/j.jet.2023.105621
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    Cited by:

    1. Mattsson, Lars-Göran & Weibull, Jörgen W., 2023. "An analytically solvable principal-agent model," Games and Economic Behavior, Elsevier, vol. 140(C), pages 33-49.

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    More about this item

    Keywords

    Moral hazard; Limited liability; Contract theory;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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