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Decentralizing the Stochastic Growth Model

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  • Danthine, Jean-Pierre
  • Donaldson, John B

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3348.

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Date of creation: Apr 2002
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Handle: RePEc:cpr:ceprdp:3348

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Keywords: business cycles; delegated management; stochastic growth model;

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  1. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  2. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  3. Brock, William A., 1980. "Asset Prices in a Production Economy," Working Papers 275, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Mirman, Leonard J. & Zilcha, Itzhak, 1975. "On optimal growth under uncertainty," Journal of Economic Theory, Elsevier, vol. 11(3), pages 329-339, December.
  5. Prescott, Edward C & Mehra, Rajnish, 1980. "Recursive Competitive Equilibrium: The Case of Homogeneous Households," Econometrica, Econometric Society, vol. 48(6), pages 1365-79, September.
  6. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
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Cited by:
  1. Francesco Busato & William Addessi, 2007. "Labor Unions and Asset Prices," Economics Working Papers 2007-05, School of Economics and Management, University of Aarhus.
  2. Ibrahim Chowdhury & Mathias Hoffmann & Andreas Schabert, . "Inflation Dynamics and the Cost Channel of Monetary Transmission," Working Papers 2003_19, Business School - Economics, University of Glasgow, revised Oct 2003.
  3. Francesco Busato & Bruno Chiarini & Elisabetta Marzano, 2008. "Consumption and income smoothing," Applied Economics, Taylor & Francis Journals, vol. 40(17), pages 2191-2207.
  4. Addessi, William & Busato, Francesco, 2009. "Fair wages, labor relations and asset returns," Journal of Financial Stability, Elsevier, vol. 5(4), pages 410-430, December.

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