Decentralizing the Stochastic Growth Model
AbstractThe 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.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3348.
Date of creation: Apr 2002
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- Jean-Pierre DANTHINE & John B. DONALDSON, 2002. "Decentralizing the Stochastic Growth Model," Cahiers de Recherches Economiques du DÃ©partement d'EconomÃ©trie et d'Economie politique (DEEP) 02.05, Université de Lausanne, Faculté des HEC, DEEP.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-02-18 (All new papers)
- NEP-DEV-2003-02-18 (Development)
- NEP-DGE-2003-02-18 (Dynamic General Equilibrium)
- NEP-MAC-2003-02-18 (Macroeconomics)
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