7.3 Owners’ Versus Managers’ Objectives
Except for the smallest of firms, one person cannot perform all the tasks necessary to run a firm. In most firms, the owners of the firm have to delegate tasks to managers and other workers. A conflict may arise between owners who want to maximize profit and managers who are interested in pursuing other goals, such as maximizing their incomes or traveling in a company jet. A conflict between an owner (a principal) and a manager (an agent) may impose costs on the firm—agency costs—that result in lower profit for the firm. However, owners can take steps to minimize these conflicts, and market forces reduce the likelihood that a firm will deviate substantially from trying to maximize profit.
Consistent Objectives ...
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