Expense-Preference Behavior in the Savings and Loan Industry

Abstract

NEOCLASSICAL MICROECONOMIC THEORY traditionally has assumed that the decision process in the firm is guided by the objective of profit maximization. A number of economists have suggested, however, that managers may pursue goals which maximize personal utility rather than firm profitability [1, 10, 11, 23, 24]. Conditions under which managerial discretion may be substituted for profit maximization include weak competition in the product or service market, a high degree of regulation, and the separation of ownership and control. Under these conditions, managers have greater opportunity to indulge in discretionary expenditures and the pursuit of managerial emoluments. That is, managers may seek to achieve a higher level of personal utility via higher salaries, additional staff, and other perquisites for which they have positive preferences. In general, this results in an expansion of expenditures beyond the profit-maximizing level and a suboptimal (X-inefficient) use of resources within the firm. The expense-preference theory of the firm recently received considerable support by the work of Edwards [3] in which he developed a test to distinguish between expense-preference and profit maximizing behavior. Upon application of this test to the banking industry, Edwards found that the number of employees and bank expenditures on wages and salaries are higher in noncompetitive banking markets;