We consider a firm where workers have pre-contractual private information regarding their cost of production. Before contracting takes place, the owner of the firm can adopt a new technology that reduces production costs for each type of worker. We show that technology adoption may have an adverse rent effect that counteracts the cost-reducing effect. This is the case whenever the new technology reduces the costs of more efficient types more strongly. Nevertheless, if the owner contracts directly with a worker (two-tier hierarchy), the cost-reducing effect always dominates. By contrast, if the firm has more hierarchical tiers such that contracting with the worker is delegated to a manager, the rent effect may prevail. Then, the owner does not adopt the new technology, even if it is costlessly available.
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Demougin, D., Schöttner, A. Technology adoption under hidden information. J Econ 100, 1–18 (2010). https://doi.org/10.1007/s00712-010-0128-1
- Hidden information
- Technology adoption