Economic Quarterly

Fall 2005

Technological Design and Moral Hazard

Edward S. Prescott

Technological choice by a principal is added to the standard moral hazard model. It is argued that this is an important margin of choice. Two examples are provided in which the choice has significant implications. In one it drastically simplifies the optimal contract. In the other, it demonstrates that the principal may be willing to choose a technologically inferior means of production to ease incentive problems.

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