A Model of Delegated Management

Abstract

The present study offers a dynamic stochastic neoclassical growth model incorporating agency conflicts between risk-averse managers and shareholders. To examine the latter contracting problem, Nash-bargained delegation, what this article often refers to as the Nash bargaining managerial contract for delegated managers, is introduced. This type of delegation facilitates the manifestation of the “external managing premium,” a discrepancy between the value of the external managerial job opportunity (transferable across firms) and that of the internal managerial job opportunity (within the firm organization); in contrast, its Pareto-optimal counterpart precludes any “external managing premium.” Within the general equilibrium context, the presence of this premium generates a time-varying investment wedge that distorts the otherwise Pareto- optimal equilibrium investment decision at the aggregate level.