Decentralizing the Stochastic Growth Model

Jean-Pierre Danthine () and John B. Donaldson

Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) from Université de Lausanne, Faculté des HEC, DEEP

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 multiperiod 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-workerinvestors 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: stochastic growth model; business cycles; delegated management (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2002-02
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Working Paper: Decentralizing the Stochastic Growth Model (2002)
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Persistent link: http://EconPapers.repec.org/RePEc:lau:crdeep:02.05

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