Williamson Theory of Firm | Objectives of Business


Williamson's Model of Managerial Utility Function or Williamson's Management Discretion Model


 
Like Baumol and Marris, Williamson also argues that managers have discretion to pursue objectives other than maximization of profit. The managers seek to maximize their own utility function provided maintaining a minimum level of profit. 

Williamson's model of firm behaviour (1963) 'focuses on the self-interest-seeking behavior of corporate managers.'

Oliver Williamson's model of managerial utility function is a combination of the objectives of profit maximization and growth maximization. Williamson emphasized upon the fact that in modern businesses, ownership is separate from management, and modern managers have discretionary powers to set the goals of firms. He further said that managers would apply their discretionary power to maximize their own utility function, with maintaining minimum profit to satisfy shareholders. 

Williamson's management discretion model assumes that managers act to further their own interests and maximize their own utility (or satisfaction), subject to a minimum profit requirement. The utility may be thought of in terms of prestige, influence, and other personal satisfactions.  The profit aimed for will not be maximum profit, because of management's wish for expenditure on themselves and their staff, and the privileges of management.


An example of how managers maximize their utility can be :
At Facebook, the great managers are supporting, they are taking care of people.....and grow in their jobs. - 'Great' Manager, CNBC

The utility function of managers, namely Um, is dependent upon managers' salary (measurable/quantifiable), job security, power, status, professional satisfaction (all non-measurable/non-quantifiable), and the power to influence the firm's objectives. To formalize the model, Williamson took measurable proxy variables like perks of the manager, office facilities like company car, and slack payments like a luxurious environment in the office, and expenditure that takes place at the discretion of the manager, heading a large number of workers, which is directly related to his power and status. 

The utility functions that managers seek to maximize include both quantifiable variables like salary and slack earnings and non-quantitive variables such as prestige power, status, job security, professional excellence, etc. Slack payments are the ones whose removal may not make the manager leave the company, but their presence not only ensures stable and better performance but is also preferred by the manager, as these payments are generally far less noticeable than monetary benefits.

Williamson Theory by FragileEconomics
Objectives of business | Williamson theory


Williamson's model can be written as follows:


Um = f (S, M, ID)  
where, 
Um = manager's utility function
S = salary/additional expenditure on staff
M = managerial payments
ID = discretionary investment.


According to Oliver Williamson's hypothesis, managers maximize their utility function subject to a satisfactory(minimum) profit. A minimum/ satisfactory profit is necessary to satisfy the shareholders, or else the manager's job security is in danger. 

Limitations


  • Like other alternative hypotheses, Williamson's theory also has certain weaknesses. His model does not to deal with the problem of oligopolistic interdependence. 
  • Williamson's theory is applied only where the rivalry between firms are not strong. In case of strong rivalry, profit maximization utility function too does not offer a more satisfactory hypothesis than profit maximization. 
  • The theory basically ignores the owner’s interest whenever there is a division between owners and managers. To this extent, it goes even beyond Baumol’s hypothesis, where managers at least ensure some minimum profit for the owners.
  • There are many variables in an organization which affects the management utility such as the salary, including bonus, perquisites, number of subordinates, and the management’s role in investment decisions. The theory is somewhat vague since the numerous dimensions of management’s utility may not always be in harmony. There is no perfect method of developing a combined yardstick, which could merge all these into a single variable.

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