Theory Of The FirmAre Firms Just In — страница 2

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maximising policies, a clever manager can always argue that her engagement in activities, like a damaging price war or an expensive advertising campaign serve the long-run prospect of high profits. This excuse is very difficult to challenge until it is too late. Another aspect is that managers aiming to maximise growth of their company (expecting higher salaries, power, prestige, etc.) often operate with a profit constraint. A profit constraint is the minimum level of profit needed to keep the shareholders happy. The effects of such a profit constraint are illustrated in Figure2. Figure2 shows a total profit curve (T). T is derived from the difference between TR and TC at each output level. If the minimum acceptable level of profit is , any output greater then Q3 will

result in a profit below . Thus a sales-maximising manager will opt for Q3 which gives the highest level of sales at the minimum possible profit. This however would not be the profit maximising option. In order to maximise profits the manager would have to chose an output level that creates Q2, where profits are highest but sales lower then in Q3. So given this conflict of interests between the owners and the managers of a firm? What are the possible solutions available to the owners, to make their agents work in their interest? It is often suggested that an effective way to control the managers behaviour and bring it in line with the owners interests, is to make the managers owners themselves by giving them a share in the company. However, research by De Meza & Lockwood

(1998) suggests that even with the managers owning assets, their performance does not necessarily become more profit raising. Rajan & Zingales (1998) assessed the impact of power and access to it on the behaviour and performance of managers. Their findings suggest that the power gained by access to critical resources is more contingent than ownership on managers or agents to make the right investment and decisions then ownership. They also report adverse effects of ownership on the incentive to specialise. Other ways to control managers include performance based pay, which can prove to be effective in the short-run but again, the long-run perspective of the firm may suffer, when managers neglect crucial Long-run investments into Research and Development, restructuring,

equipment or advertising to raise short-run profits and hence their own salaries. In conclusion it is important to note that profit maximisation fails to demonstrate a general validity when applied as a theory of firm-behaviour. The real world businesses often operate on a multi-dimensional basis with many confronting interests and aims. As well as differing short-run and long run aims. Therefore profit-maximisation should be regarded as one possible goal of a firm but not necessarily its sole one. There is also a difference to be noted between the size of firms. A small family-run business for instance can easily adopt a pure profit-maximising approach, since the utility of its owners equals that of the labour-force and the management. In this setting, the income will equal

profit. Therefore it is imperative to assess and develop a theory of firm behaviour on the different classes of firms with a perspective to their individual differences in management, ownership and market enviroment. Bibliography Begg D., Fischer S. & Dornbusch R. (1994) Economics 4th. Ed. Sloman J., (1994) Economics 2nd Ed. De Meza D. & Lockwood B. (1998) Does Asset Ownership always motivate Managers? Outside Options and the Property Rights Theory of the Firm. Quarterly Journal of Economics Vol. CXIII (2) Rajan R.G. & Zingales L. (1998) Power in a Theory of the Firm. Quarterly Journal of Economics Vol. CXIII (2) Putterman L. & Kroszner R.S. editors- (1996) The economic nature of the Firm a reader 2nd edition