Alternative Business Objectives and the Principal-Agent Problem

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• identifies a relevant alternative objective, e.g. sales revenue maximisation, satisficing, or managerial utility maximisation.1 mark
• linked detail explaining the manager's incentive, e.g. managerial pay, status or job security may be linked to firm size or sales rather than profit.1 mark
• identifies the principal-agent problem as the underlying cause, e.g. managers have more information than shareholders and can pursue their own goals.1 mark
• linked detail, e.g. this produces a different output, price or level of spending than the profit-maximising benchmark.1 mark

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Tick each line you got. Your score builds from the marks on the scheme.

• Limited knowledge of the principal-agent problem or alternative objectives; little or no application; undeveloped analysis; no evaluation.5 marks
• Accurate knowledge of at least one alternative objective model; some application; one developed chain of analysis; evaluation limited or assertive.5 marks
• Constructs a developed chain of analysis showing how information asymmetry and alternative managerial objectives (e.g. revenue maximisation, satisficing, managerial utility maximisation) cause a large firm's actual output to diverge from the profit-maximising output where MC=MR; begins to weigh this against a counterargument.5 marks
• As Level 3, with a well-substantiated, two-sided evaluation and a supported final judgement on whether 'never' is justified.5 marks
• Specific content that can gain credit: the divorce of ownership from control and the resulting information asymmetry create a genuine incentive for managers to pursue objectives other than profit, as modelled by Baumol (revenue maximisation), Simon (satisficing) and Williamson (managerial utility maximisation), each producing an output or spending pattern that differs from the pure profit-maximising benchmark; the counterargument is that corporate governance mechanisms, including performance-related pay and share options tying reward to profit or share price, stronger reporting and audit requirements, activist shareholders, and the disciplining threat of a hostile takeover, can realign managerial behaviour back towards profit maximisation; not all large firms exhibit a strong divorce of ownership from control, for example founder-led or owner-managed firms may have much smaller agency problems; a supported judgement should state that 'never' is too strong a claim, since the size of the divergence from profit maximisation depends on the strength of a firm's corporate governance and the degree of external market monitoring it faces, rather than being a fixed, universal outcome.5 marks

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