Marris model of manageria discretion

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Marris’s model identifies growth in general as an important factor to the agent (management) and shows the constant battle between satisfying the principal (shareholders) and achieving managements’ utility. This appears more consistent with the difficulties shareholders have in aligning their managements’ interests with there own.

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INTERNATIONAL INSTITUTE OF PROFESSIONAL STUDIES: 

INTERNATIONAL INSTITUTE OF PROFESSIONAL STUDIES MICRO ECONOMICS MARRIS MODEL OF MANAGERIAL DISCRETION

ROBIN MARRIS: THE ECONOMIST: 

ROBIN MARRIS: THE ECONOMIST ROBIN MARRIS is professor emeritus of economics at birkbeck College, London university. His publications include how to save the underclass, economic arithmetic, the economic theory of managerial capitalism, the economics of capital utilization, the corporate economy, the corporate society, and reconstructing Keynesian economics under imperfect competition, plus numerous articles in learned journals, magazines and newspapers. He provides theory of managerial discretion which seems to be an important theory of economics.

HISTORY: 

HISTORY Discretion to run corporations and exercised it to pursue objectives other than maximizing shareholder market value. The takeover mechanism should be even less effective than it seems to be in practice. Two critical factors in that bargaining process are the incumbent management's productivity relative to rivals and the wages that rivals demand.

MANAGERIAL DISCRETION: 

MANAGERIAL DISCRETION Perceived attitude of action. Exercise of managers in ethical situations. Analyzing solutions and alternate factors for decision making. Determined by the interaction of individual, organizational and environmental forces and has been linked to individual and organizational demographics and characteristics Study of cause and effect.

MARRIS MODEL OF MANAGERIAL DISCRETION: 

MARRIS MODEL OF MANAGERIAL DISCRETION Robin Marris is the developer of the model. It is developed in 1964.According to this theory, modern firms are managed by both the manager and the shareholders. A manager aims to maximize the rate of growth of the firm and the shareholders will try to maximize the dividend and the increase the share price. Marris’s model of managerial enterprise is based on the goal of the manager to increase the balanced growth of the firm . this balance is achieved by offsetting two opposite goals; maximisation of the growth of demand for goods/services of the firm and maximisation of growth of capital.

To maximize growth in capital the management must distribute as much profit as possible back to the shareholders. To increase the demand customers have for the firm’s goods or services. This is achieved by using as much of the firms profits for investment and increase the firms growth. This would increase the management’s utility at the sacrifice of shareholder utility. To achieve this balance it is necessary to employ two constraints; managerial constraint and job security constraint or financial constraints. : 

To maximize growth in capital the management must distribute as much profit as possible back to the shareholders. To increase the demand customers have for the firm’s goods or services. This is achieved by using as much of the firms profits for investment and increase the firms growth. This would increase the management’s utility at the sacrifice of shareholder utility. To achieve this balance it is necessary to employ two constraints; managerial constraint and job security constraint or financial constraints. MARRIS THEORY OF GROWTH MAXIMISATION AND MANAGERIAL ENTERPRIS E

The managerial constraint is set by the skills of the current management team or by the limit by which the management team can be increase to increase those skills. . New managers take time to get integrated in the team. Managerial team constraint sets limits to both the rate of growth of demand and rate of growth of capital. : 

The managerial constraint is set by the skills of the current management team or by the limit by which the management team can be increase to increase those skills. . New managers take time to get integrated in the team. Managerial team constraint sets limits to both the rate of growth of demand and rate of growth of capital. MANAGERIAL CONSTRIANTS

Managers strive for growth of demand i.e to maximize sales rather than profit max. The owners want to maximize their utility while the managers attempt maximization of their own utility. Managers wanting to maximize rate of growth of demand rather than absolute size of the firm, believe that growth of demand for the products is an appropriate indicator of the growth of the firm. As the rate of growth of demand is increased, profitability is increased as well until a certain point. Then managerial constraints on growth tend to take place. The growth of demand for the products of the firm depends on the rate of diversification and the proportion of successful new products

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It is reasonable to assume that maximising the long-run growth of demand of the product is an indicator is equivalent to maximising the long-run growth rate of the others. Growth of demand => advertising expenditures; further price reductions; extensive advertisements

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Rate of Profit and growth

FINANCIAL CONSTRAINTS: 

FINANCIAL CONSTRAINTS Job security constraint is set by the amount the manager has to do to reduce the chances of dismissal. The manager may have to distribute a certain amount of profits to share holders to keep them happy with the manager’s performance. It is also necessary to keep share prices at a high enough level to reduce the chance of take over. Reducing risky investments will have similar effects.

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Main goal is to maximize profits and prestige which comes from maximized sales. The rate of growth of capital supply: The shareholders who are the owners, wish to maximize company's capital, which is the measure of the size of the firm. The main source of finance for the growth of the firm is profit but the management can retain only part of it, for another part has to be distributed as dividend.

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The rate of growth of capital is determined by three factors: the three financial ratios determined by the managers constituting the financial security constraint, the average rate of profit, and the rate of diversification. Job security attained by pursuing a prudent financial policy which requires the three crucial financial ratios to be maintained at optimum levels. Liquidity ratio: current ratio – ratio of liquid assets to total assets. Low liquidity increases the risk of insolvency (risk=+ve) Leverage/debt or debt-equity ratio: ratio of debt to total assets.

-High debt-equity ratio exposes the firm to bankruptcy.(Risk=+ve) : 

-High debt-equity ratio exposes the firm to bankruptcy.(Risk=+ve) -Profit retention ratio: high retention of profits, adds to the reserves contributing to the growth of capital.(Risk= -ve)

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Owners being interested in the growth of the firm want maximization of the growth of the supply of capital , which is assumed to maximize the owner’s utility. The maximum growth of capital function shows the relationship between the firm’s rate of profit and the maximum ate at which the firm is able to increase its capital . growthrate

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POLICY VARIABLES IN MARRIS’S BALANCED GROWTH MODEL ARE AS FOLLOWS:- 1. The firm has the freedom to choose its financial policy, as it subjectively determines the three financial ratios, liquidity ratio, leverage/debt ratio and retention ratio. 2. The firm can decide its diversification rate, either by expanding the range of its products, or by merely effecting a change in the style of its existing range of products. OR it can adopt the two policies simultaneously. 3. Price is not a policy variable of the firm. It is a parameter. Price is taken as given by the oligopolistic structure of the market. Production costs are also taken as given. 4. The firm has the freedom to decide the level of it advertising and R&D. Since price and production costs are given, increase in advt. & R&D, will imply lower profit margin and vice-versa.

ADVANTAGES OF MARRIS’S THEORY: : 

ADVANTAGES OF MARRIS’S THEORY : Incorporation of financial policies in decision making. Matches the goals of managers and owners to increase utility.

DISADVANTAGES OF MARRIS THEORY : 

DISADVANTAGES OF MARRIS THEORY Assumes given production costs and a price structure and do not detetrmines any other factors which affects growth. Marris’s assumption that the growth of the firm is achieved mainly via the introduction of new products only by the competitors.

MARRIS DETERMINANTS OF GROWTH OF FIRM: 

MARRIS DETERMINANTS OF GROWTH OF FIRM

TECHNOLOGICAL ACQUISITION: 

TECHNOLOGICAL ACQUISITION Technological efforts of a firm as a route through which it can change its "super environment“. Technology acquisition in determining inter-firm variation in growth. The effect of technology variables [imports and domestic efforts] in determining growth across the three different policy regimes.

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firms that are successful in complementing the new and updated imported technology with their in-house R & D efforts are likely to grow faster than the others during this period.

FIRMS SIZE: 

FIRMS SIZE Direct relationalship between size and the growth. Large size of firm has more powers to acquire various factors which causes growth. Helps in predicting various variables available for growth. growth curve resources e size of firm

PROFIT: 

PROFIT Determines a firm's ability and willingness to grow. Higher the level of current profitability, better would be the position of the firm to raise external funds on favorable terms. Growth is a linear function of profit-margins.

VERTICAL INTEGRATION : 

VERTICAL INTEGRATION Exploitation of internalization advantages may enable a firm to earn higher profits and raise exports. Significant in determining growth in the second and third period.

CAPITAL INTENSITY : 

CAPITAL INTENSITY Efficient utilization of capital stock, with a corresponding reduction in the marginal cost of its output, is likely to influence growth rate favorably. Growth of the firm along with the demand for growth curve would increase capital-output ratios.

FIRM AGE : 

FIRM AGE The longer the time the firm has already spent in the same line of business, more difficult it would be for the firm to grow. An inverse relationship between the age of the firm and the growth rate during all the three policy periods. Growth = f (technology acquisition, size, profits, vi, ci, age).

NEED: 

NEED Large capital holding of firms have the option of competing with smaller enterprises but the smaller firms cannot always reciprocate. Growth is an incidental factor in an analysis of the firm. The main constraint on the firm is provided by the production function to define the technically efficient region. Needs to introduce optimum size to determine the growth path of a firm.

DEVELOPMENT: 

DEVELOPMENT Marris (1964) was the first to develop a rigorous model to analyze the growth and profits of firms. Deals with optimum growth path given by the demand and supply of growth functions, rather than the static demand and supply functions. Analyze the Role of technological factors, along with size, in determining inter-firm differences in growth.

CONCLUSION: 

CONCLUSION Marris’s model identifies growth in general as an important factor to the agent (management) and shows the constant battle between satisfying the principal (shareholders) and achieving managements’ utility. This appears more consistent with the difficulties shareholders have in aligning their managements’ interests with there own.

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Thank you!!!!!! GIVEN BY:- SURBHI VANI