Marris' Model of Managerial Enterprise, Managerial Economics Assignment Help

Objectives of the Firm - Marris' Model of Managerial Enterprise, Managerial Economics

Marris' Model of Managerial Enterprise

The goal of the firm in Marris's model is the maximisation of the balanced rate 'of growth (g) of the firm. The growth depends on the growth of demand for the products of the firm (gD) and the growth of its capital supply (gc)'

Maximise g = gD = gc

In pursuing this balanced growth rate, the firm has two constraints. Firstly, the managerial constraint set by the available 'managerial team and its skills, and secondly, the financial constraint set by the desire of managers to achieve maximum job security. By jointly maximising the rate of growth of demand and capital the managers achieve maximisation of their own utility as well as utility of the shareholders. The conflicting interests of owners and management coincide with the objective of balanced growth of the firm as it ensures fair return on owner's capital and faith in managers who achieve this goal.

Marris specifies two utility functions. The utility function" of managers (Um) includes variables like salaries, status power and job security. The utility function of owners (Uo) includes variables such as profits, size of output, size of capital, share of the market and public image.

Um = f (salaries, power, status, job security)

Uo= f (profits, capital. output, market share, public esteem)

Marris argues that the differences between the goals of managers and the goals of the owners are not so wide as the variables in both functions are strongly correlated by the size of the firm. Maximisation of these variables depends on the maximisation of growth rate of the firms. The managers, therefore seek to maximise a steady growth rate. Thus, the utility functions can be rewritten.

Um = f (g D, s)

Uo = f ( g c)

where s measures job security. Marris adopts thesis of Penrose to explain the constraint to g D set by the decision making power of the managerial team. Marris suggests that's' can be measured by a weighted average of three crucial ratios.

-        The liquidity ratio,

-        The leverage - debt ratio and

-        Profit - retention ratio.

Marris treats's' as an exogenously determined constraint by assuming that there is saturation level for job security Above the saturation level, the marginal utility from an increase in 's' is zero and below the saturation level, it becomes infinite.

Marris' model is ingenious in that it postulates a solution which maximises the utility of both managers and the owners. The model also deals with the observed fact of multiplicity of goals. Further, it shows that growth and profits are competing goals in the real world. But it does not justify the preference of owners for capital growth over "maximisation of profits. The model fails to explain interdependence in oligopolistic markets. It also does not explain how price is determined in the market. 

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