The Macroeconomics of Delegated Management

FAME Research Paper No. 88

52 Pages Posted: 31 Jul 2003

See all articles by Jean-Pierre Danthine

Jean-Pierre Danthine

University of Lausanne - Institute of Banking and Finance (IBF); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

John B. Donaldson

Columbia Business School - Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2003


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.

JEL Classification: E32, E44

Suggested Citation

Danthine, Jean-Pierre and Donaldson, John B., The Macroeconomics of Delegated Management (June 2003). FAME Research Paper No. 88, Available at SSRN: or

Jean-Pierre Danthine (Contact Author)

University of Lausanne - Institute of Banking and Finance (IBF) ( email )

Lausanne, 1015
+41 21 692 3485 (Phone)
+41 21 692 3335 (Fax)


Centre for Economic Policy Research (CEPR)

United Kingdom

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900

John B. Donaldson

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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