IAI Actuarial Core Principles · Business Economics · Relationship between economics and business
A large Indian life insurer is owned by dispersed shareholders but run by professional managers who pursue rapid growth in premium income even where this lowers shareholder returns. Which theory of the firm does this behaviour best illustrate?
This illustrates a managerial theory of the firm. Because ownership is separated from control, managers may pursue their own objectives, such as growth or sales, even when this reduces shareholder profit, which is a principal-agent problem.
- APerfect competition with price-taking firms
- BA managerial theory in which managers pursue their own objectivesCorrect
- CThe satisficing theory of consumer demand
- DThe theory of comparative advantage
- Pure profit maximisation by owners
Explanation
When ownership and control are separated, managers may pursue objectives such as growth or sales revenue that serve themselves, at some cost to shareholder profit. This is the principal-agent problem addressed by managerial theories such as Baumol's sales maximisation.
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