Where GD = growth rate of demand for firms product
GC = growth rate of capital supply to the firm.
In simple words, a firm’s growth rate is balanced when demand for its product and supply of capital to the firm increases at the same rate.the two growth rates according to Marris, translated into two utility functions: i. Manager’s utility function
ii. Owner’s utility function
The Manager’s utility function (Um ) Owner’s utility function - Uo may be specified as follows: Um = f( salary, power, job, security, prestige, status)
Uo = f( output, capital, market-share, profit, public, esteem). Owners’ utility function (Uo) implies growth of demand for firms product and supply of capital. Therefore, maximization of Uo means maximization of ‘demand for firm’s product’ or growth of capital supply’. According to Marris, by maximizing these variables, managers maximize both their own utility function and that of the owners. The manager can do so because most of the variables (e.g: salaries, status, job security, power etc.) appearing in their own utility function and those appearing in the utility function of the owner (e.g: profit capital, market-share, , public,etc) are positively and strongly correlated with a single variable i.e., size of the firm. Maximization of these variables depends on the maximization of the growth rate of the firm. The managers, therefore, seek to maximize a steady growth rate. This theory can be explained with the help of the following diagram
Marris’s theory, thought more rigorous and sophisticated than Baumol’s sales revenue maximization, has its own weakness. It fails to deal satisfactorily with oligopolistic interdependence. Another serious shortcoming of this model is that it...