Profit-maximizing Owners Research Articles

Do consumers gain or lose when managers become socially concerned?

The Friedman Doctrine states, “an entity's greatest responsibility lies in the satisfaction of the shareholders.” This leads us to consider managerial firms’ corporate social responsibility (CSR) activities delegated by profit-maximizing owners. Our research follows the Ferstman-Judd-Skilvas framework to examine if profit-maximizing owners could ask managers to be socially rather than privately concerned and its impacts on social welfare, contributing to the literature of CSR by presenting the following results. First, CSR delegation is a dominant strategy. Second, CSR delegation reduces the industry output level. We further show that consumers’ surplus and social welfare decrease in the number of managerial firms adopting CSR delegation. The above results imply that socially concerned managers with profit-maximizing owners are socially undesirable in a market with output delegation.

Risk and Discrimination

Abstract In the traditional Becker model of employer discrimination, discriminatory behavior arises from a utility-maximizing owner who balances firm profits against the disutility of hiring workers from the disadvantaged demographic group. However, in the modern firm, many human resource decisions are made by agents of the owner (managers) whose actions may not reflect the preferences of even profit-maximizing owners. We present a principal-agent model of discrimination with a profit-maximizing owner and a gender-discriminating manager and show that managerial discrimination is increasing with the degree of risk in the firm’s revenue stream. Empirical tests using a Colombian plant-level dataset support a prediction of our model that female workers should be under-represented in more revenue volatile firms and industries.

Combining the Endogenous Choice of the Timing of Setting the Levels of Strategic Contracts and Their Contents in a Managerial Mixed Duopoly

This study considers a game in which both, the timing of setting the levels of strategic contracts and their contents, are endogenized in a managerial mixed duopoly composed of a public firm with a welfare-maximizing owner and a private firm with a profit-maximizing owner. We suppose that the managers of both, the public firm and the private firm, adopt sales delegation contracts that are equal to the weighted sum of their profits and sales revenue with respect to the incentive parameters. We show that the market structure such that the manager of the public firm with a quantity contract is the follower and the manager of the private firm with a price contract is the leader can become the unique equilibrium market structure in the game in which both, the timing of setting the levels of strategic contracts and their contents, are endogenized in a managerial mixed duopoly. In addition, highest social welfare can be achieved in such a unique equilibrium market structure. Therefore, it is not necessary for the relevant authority, including the government, to regulate free decisions on the timing of the levels of the strategic contracts for the owners of both, the public firm and the private firm.

Combining the endogenous choice of the timing of setting incentive parameters and the contents of strategic contracts in a managerial mixed duopoly

This study considers a game in which both the timing of setting the incentive parameters and the contents of the strategic contracts are determined endogenously. We investigate this game in a managerial mixed duopoly comprising a public firm with a welfare-maximizing owner and a private firm with a profit-maximizing owner. We suppose that the managers of both firms are employed based on their sales delegation contracts, which are equal to the weighted sum of their profits and sales revenues with respect to their FJSV incentive parameters. We show that two equilibrium market structures are possible in this game: (1) the market structure in which the owner of the public firm is the follower with a quantity contract and the owner of the private firm is the leader with a price contract and (2) the market structure in which the owners of both firms use price contracts and set their FJSV incentive parameters simultaneously in the late period. Furthermore, we show that the highest degree of social welfare can be achieved with the first equilibrium market structure. Therefore, the game considered in this study differs from the game in which both the timing of setting the incentive parameters and the contents of the strategic contracts are determined endogenously in a managerial private duopoly composed of two firms with profit-maximizing owners. Specifically, in the game considered in this study, it is unnecessary for the corresponding authority, such as the government, to regulate the free determination of both the timing of setting the incentive parameters and the contents of the strategic contracts based on each firm's individual incentive. In addition, since the cost functions and their quantities are represented under the technologies of both firms, we confirm the results concerning the equilibrium market structures and welfare implications obtained in the case where both firms have constant marginal cost functions with respect to their quantities.

Risk and Discrimination

In the traditional Becker model of employer discrimination, discriminatory behavior arises from a utility-maximizing owner who balances firm profits against the disutility of hiring workers from the disadvantaged demographic group. However, in the modern firm, many human resource decisions are made by agents of the owner (i.e., managers) whose actions do not necessarily reflect the preferences of even profit-maximizing owners. In this paper, we present a principal-agent model of discrimination with a profit-maximizing principal (owner) and a gender-discriminating agent (management). We show that managerial discrimination is increasing with the degree of risk in the revenue-generating process. We then test this relationship using a Colombian plant-level dataset and show that, consistent with our model, the female share of the labor force is decreasing in various measures of both industry-level and plant-level volatility.

Can We Find It at the Concessions? Understanding Price Elasticity in Professional Sports

The sports economics literature regularly finds that sports teams price admissions in the inelastic range of demand. Given that marginal revenue is negative in this range, yet marginal cost is always nonnegative, this result suggests an inconsistency in the profit motive of owners. In this article, we attempt to explain inelastic ticket pricing by considering the complementarity between tickets sold and concessions. Depending on marginal revenue and cost parameters, we show that it is entirely possible to find profit-maximizing owners pricing tickets in the inelastic region of demand to sell more concessions.

Owner Objectives and Competitive Balance

A growing literature on leagues composed of owners maximizing winning percentage shows that particular league rules have different impacts compared with leagues composed of profit-maximizing owners. But the underlying question of how to distinguish between the two types of leagues has received no treatment. In this article, we show that the two types of leagues can be distinguished in the talent market. A league of winning-percentage-maximizing owners will have higher talent costs and greater demand for talent. But, and perhaps more important, the level of competitive balance between the two types of leagues is indeterminate. In addition, a new policy instrument is suggested, namely, nudging owners toward one or the other objective, depending upon the particular locations of the demand for talent if owners pursue profits or winning percentage.

The Equivalence of Price and Quantity Competition with Delegation

In a two-stage differentiated-products oligopoly model, profit-maximizing owners first choose incentive schemes in order to influence their managers' behavior. In the second stage, the managers compete either both in prices, both in quantities, or one in price and the other in quantity. If the owners have sufficient power to manipulated their managers' incentives, the equilibrium outcome is the same regardless of how the firms compete in the second stage. If demand is linear and marginal cost is constant, basing the manager's objective function on a linear combination of the firm's profit and its rival's profit is sufficient for the equivalence result. Copyright 2001 by the RAND Corporation.

The Impact of Competition on Performance Disparities in Organizational Systems

Stephen Jay Gould suggests that individual ability has an upper bound in competitive endeavors and tends to improve as a result of that competition. Consequently, over time there is a diminution in the differences in individual performance that will be observed in, and have an impact on, organizational systems. Major League Baseball offers an interesting opportunity for exploring that suggestion in depth. Based on seven performance categories, this article suggests that there has not been any long-term trend toward lessening the talent disparities in baseball. Rather, the bulk of the empirical evidence leads to the conclusion that the disparities have widened. Gould offers his thesis as an explanation for the observed long-term trend of increased competitive balance in the majors. Because the thesis fails the empirical test, the economic explanation of rational profit-maximizing owners who recognize the need to maintain fan interest through competitive games and pennant races retains its pride of place.

Sales Maximization and Specific Human Capital

Profit-maximizing owners of firms may find it optimal to provide managers with incentives to maximize sales in addition to profits. This influences the outcome of the bargaining game between workers and managers over workers' wages and helps to solve the problem of underinvestment by workers in specific human capital. Iinvestigate optimal managerial contracts from this point of view and show that the optimal contract is a function of sales in addition to profits.

The natural interest rate of the forest: Macroeconomic requirements for sustainable development

The goal of sustainable development implies a society that is both economically and environmentally reproducible in the long run. The assumption of reproducibility of forests, a renewable resource, has important implications for a market economy. A profit-maximizing owner will let a forest continue to grow, or regenerate after harvesting, if that choice yields a greater net present value than immediate harvesting without regeneration. The choice depends in part on the relationship between the forest's growth rate and the owner's discount rate. For each forest, there is a threshold interest rate above which the owner will prefer harvesting without regeneration. The interest rate thus is not only the market price of capital; it must also stay below a critical level if the market is to allow forest conversation. This reflects the dual nature of forests, as both marketable assets and as parts of natural ecosystems. Such cases of dualism are important in the development of ecological economics, and can be seen as parallel to the dual nature of labor and wages in Marxian theory. For long-run sustainability, interest rates must be low enough to allow forest conservation. This might threaten disequilibrium in capital markets, and cause inflationary pressure. The solution is to lower the marginal rate of profit on new investments, bringing markets back to equilibrium at a lower interest rate – with the likely long-term consequence of slower economic growth due to slower capital formation.