3.1.1 Sizes and types of firms

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    a) Reasons why some firms tend to remain small and why others grow

     

    b) Significance of the divorce of ownership from control:
    The principal-agent problem
    The principal-agent problem can be linked to the theory of asymmetric information
    This is when the agent makes decisions for the principal, but the agent is inclined to act in their own interests, rather than those of the principal
    When an owner of a firm sells shares, they lose some of the control they had over the firm
    Could result in conflicting objectives between different stakeholders in the firm
    E.g. shareholders and managers have different objectives which might conflict
    • Managers might choose to make a personal gain, like a bonus, rather than maximise dividends of the shareholders
    If the manager is particularly good, they might require higher wages to keep them in the firm.
    But they also need to keep shareholders happy, since they are an important source of investment
    Isn’t always possible to give both the manager a high salary and the shareholders large dividends, since funds are limited
    c) Distinction between public and private sector organisations

    d) Distinction between profit and not-for-profit organisations
    A profit organisation aims to maximise the financial benefit of its shareholders and owners. The goal of the organisation is to earn maximum profits.
    A not-for-profit organisation has a goal which aims to maximise social welfare. They can make profits, but they cannot be used for anything apart from this goal and the operation of the organisation

     

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