Technology Adoption Under Hidden Information

Abstract

We consider a firm where workers have pre-contractual private information on 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, the cost-reducing effect always dominates. By contrast, if the owner delegates contracting with workers to a manager, the rent effect may prevail. In this case, the owner does not adopt the new technology, even if it is costlessly available.

Keywords: Adverse Selection, Hierarchies, Technology

JEL Classification: D82, L23, O33