The Macroeconomics of Delegated Management

We are interested in the macroeconomic implications of the separation of ownership and control. We propose an alternative decentralized interpretation of the stochastic growth model, one where shareholders hire a self-interested manager who is in charge of the firm’s hiring and investment decisions. Under imperfect monitoring and incomplete contracting, 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 both types of agents, once aggregate market clearing conditions are taken into account. We derive the dynamic consequences of this divergence in intertemporal marginal rates of substitution and discuss the likelihood that appropriate incentive contracts offered the manager will mitigate the consequences of this divergencebusiness cycles, delegated management, contracting