AMAN KUMAR SINHA

NEELAM BARA

Introduction
In 1964,Oliver E. Williamsons hypothesised that
the managers look at their self-interest while
making decisions regarding price, output, sales
etc. of a firm. Hence, their decisions regarding
price, output etc. differ from those of a profit
maximizing firm.
It is also known as Managerial Discretion
Theory.
Williamson emphasized on two aspects-
Shareholders
Managers
ASSUMPTIONS
This model is conducted under weakly
competitive environment.
There is divorce of ownership from control.
A capital market impose minimum profit
constraints.


Managerial Utility Function

Salaries/Expenditure on staff
Managerial Slack
Discretionary Funds
Utility function of a manager can be given by
U = f (S, M, D)

Modes of Profits
Actual Profit = R-C-S

Where R is the total revenue, C is the cost of
production and S is the staff expenditure.

Required Profit = Actual profit - M

Where M is the managerial slack.

Continued.

Minimum profit = Required Profit T

Where T is the tax amount

Discretionary profit = Minimum profit SH

Where Sh is the Share Holders Dividend


Maximum Utility Graph



Criticism

Williamson theory does not clarify the basis of
the derivation of feasibility curve.
He fails to indicate the constraint in the profit-
staff relation. s
The model fails to describe how businesses
take their price and output decisions in a
highly competitive set up.
The model does not apply in a dynamic set up
like changing demand and cost conditions
during booms and recessions.
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