The Macroeconomics of Delegated Management
43 Pages Posted: 26 Sep 2003
There are 2 versions of this paper
The Macroeconomics of Delegated Management
Date Written: August 2003
Abstract
We are interested in the macroeconomic implications of the separation of ownership and control. An alternative decentralized interpretation of the stochastic growth model is proposed, one where shareholders hire a self-interested manager who is in charge of the firm's hiring and investment decisions. Delegation is seen to give rise to a generic conflict of interests between shareholders and managers. This conflict fundamentally results from the different income base of the two types of agents, once aggregate market clearing conditions are taken into account. An optimal contract exists resulting in an observational equivalence between the delegated management economy and the standard representative agent business cycle model. The optimal contract, however, appears to be miles away from standard practice: the manager's remuneration is tied to the firm's total income net of investment expenses, abstracting totally from wage costs. In order to align the interest of a manager more conventionally remunerated on the basis of the firm's operating results to those of stockholder-workers, the manager must be made nearly risk neutral. We show the limited power of convex contracts to accomplish this goal and the necessity, if the manager is too risk averse (log or higher than log), of considerably downplaying the incentive features of his remuneration. The difficulty in reconciling the viewpoints of a manager with powers of delegation and of a representative firm owner casts doubt on the descriptive validity of the macro-dynamics highlighted in the representative agent macroeconomic model.
Keywords: Business cycles, delegated management, contracting
JEL Classification: E32, E44
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Labor and the Market Value of the Firm
By Monika Merz and Eran Yashiv
-
The Cost of Labor Adjustment: Inferences from the Gap
By Russell Cooper and Jonathan L. Willis
-
Bounds on the Variances of Specification Errors in Models with Expectations
By Steven N. Durlauf and Robert E. Hall
-
Share Prices and the Value of Workers
By Eran Yashiv
-
Uncertainty of Future Performance: The Impact of Labor Investment and Labor Flexibility
-
Hiring Costs of Skilled Workers and the Supply of Firm-Provided Training
By Marc Blatter, Samuel Muehlemann, ...