Empirical Evidence: Ownership Form

Abstract

Microeconomic theory traditionally assumed that firms attempt to maximize profits, that is, firms are single-minded in the pursuit of profits. Accordingly, the theory implicitly assumed that either every individual in the firm was so inclined or that they could be made to act as if they were. These assumptions are due, in part, to a view of the firm whereby the owners occupy the top of the “pyramid.” These owners then elect a board of directors who reflect and carry out the wishes of the owners to maximize profits. The board, in turn, hires managers who carry out the interests of the owners indirectly through the orders of the board: the board fires those managers who do not. Managers give orders to subordinates, who give orders to their subordinates in a manner which assures that the wishes of the owners are carried out.