Working Paper: CEPR ID: DP3348
Authors: Jean-Pierre Danthine; John B. Donaldson
Abstract: The objective of this Paper is to propose a number of alternative decentralized interpretations of representative agent style stochastic growth economies and to explore their implications for the generality of this model construct. Under our first interpretation, firms exist forever and undertake all multi-period investment decisions while consumer-worker-investors only own financial claims to the firm?s output. This contrasts with the more standard decentralization approach where firms exist on a period-by-period basis and consumer-worker--investors have direct title to the economy?s capital stock. Under our second interpretation shareholders hire a manager who undertakes the firm?s investment decisions in conformity with his incentive contract. The time series properties of the shareholder-manager economy are seen to replicate those of the analogous representative agent economy if and only if the manager?s contract assumes a specific form. This suggests the time series properties of an economy where incentive contracts such as stock option plans are pervasive will differ from those of more standard real business cycle models.
Keywords: business cycles; delegated management; stochastic growth model
JEL Codes: E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contract structure (L14) | economic outcomes (F61) |
| incentive contracts (D86) | time series properties (C22) |
| ownership structure (G32) | investment behavior (G11) |
| manager's contract form (M55) | economic dynamics (P42) |
| deviation from specified contract form (K12) | differences in time series properties (C22) |