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Williamson's Utility Maximisation

 Williamson's Utility Maximisation

       Williamson has developed managerial utility maximisation objective as against profit maximisation. It is one of the managerial theories and is also known as the managerial discretion theory’.
In large modern firms, shareholders and managers are two separate groups. The former wants maximum return in their investment and hence their maximisation of profits. The managers on the other hand have consideration other than profit maximisation in their utility functions. Thus the managers are interested not only in their own emoluments but also in the size of their staff and expenditure on them. Thus Williamson’s theory is related to the maximisation of the manager’s utility which is a function of the expenditure on staff and emoluments and discretionary funds. “To the extent that pressure from the capital market and competition in the product market is imperfect, the manager therefore has discretion to pursue goals other than profits.”

To pursue his goal of utility maximisation, the manager directs the firm’s resources in three ways:

  1. The manager desires to expand his staff and to increase his salaries. “More staff is valued since they lead to the manager getting more salary, more prestige and more security.” Such staff expenditures by the manager are denoted by S.
  1. To maximise his utility the manager indulges in featherbedding such as pretty secretaries, company cars, too many company phones, perks for employees etc. such expenditures are characterised as Management Slack (M) by Williamson.
  1. The manager likes to setup discretionary funds for making investments to advance or promote company projects that are close to his heart. Discretionary profits or investments (D) are what remain with the manager after paying taxes and dividends to shareholders in order to retain an effective control of the firm. Thus the manager’s utility function is U = f(S,M,D), where U is the utility function, S is the staff expenditure, M is the management slack and D is the discretionary investments. These decision variables (S,M and D) yield positive utility and the firm will always choose their values subject to the constraints. S3O, M3O and D3O.

          Williamson assumes that the law of diminishing marginal utility applies so that when additions are made to each other of S,M and D they yield smaller increments of utility to the manager.
    To describe Williamson’s utility maximisation theory diagrammatically, it is assumed for the sake of simplicity that, U = F(S,D).

          So that discretionary profits (D) are measured along the vertical axis and staff expenditure (S) on the horizontal axis in the sketch. FC is the feasibility curve showing the combinations of D and S available t the manager. It is also known as the profit staff curve. UU1 and UU2 are the indifference curves of the manager which show the combinations of D and S. To start, we move along the profit staff curve from point F upward, both profits and staff expenditures increase till point P is reached. P is the profit maximisation point for the firm where SP is the maximum profit level when OS staff expenditures is incurred. But the equilibrium of the firm takes place when the manger chooses tangency Point M where his highest possibility utility function UU2 and the feasibility curve FC touch each other. Here the manager’s utility is maximised. The discretionary profits OD (=S1M) are less than the profit maximisation profits SP. But the staff emoluments OS1 are maximised. Nevertheless Williamson points out those factors like taxes, changes in business conditions etc. by affecting the feasibility curve can shift the optimum tangency point like M in the representation. Likewise, factors like changes in staff, emoluments, profits of stock holders etc by changing the shape of the utility function will shift the optimum position.


  2. Criticism

    1. He does not clarify the basis of the derivation of his feasibility curve. In particular, he fails to indicate the constraint in the profit relation, as represented by the shape of the feasibility curve.

    2. He lumps together staff and manager’s emoluments in the utility curve. This mixing up of non- pecuniary benefits of the manager makes the utility function ambiguous.

    3. This model does not deal with oligopolistic interdependence and of oligopolistic competition.

  3. Output Maximisation
  4.       Milton Kafolgis suggests output maximization as the objective of a business firm. As per him, “The performance of firms frequently is measured directly in terms of physical output with revenue occupying a secondary position.” Thus Kafolgis prefers output maximisation both to profit maximisation and revenue maximisation as the objective of a firm. Given some minimum level of profits, a firm wants to maximise its output. It will expend its funds on increasing its production rather than on advertising. Thus the firm will produce a larger output and its revenue sales may be less than the sales maximisation firm.


  1. Kafolgis’ emphasis on output maximisation as against Baumol’s sales maximisation is not a satisfactory explanations of the objective of a firm.

  2. If the firm simply aims at output maximisation without sales maximisation, it may not be in a position to survive for long.

  3. Both the objectives are complementary rather than competitive. Second, if the firm is a multi product firm, how the output of different products says radio, TV and watches can be added. It is only the value of sales of each product that can be added together. This is nothing but maximisation of sales.

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