Thursday, May 29, 2008

The end of the profit-maximizing firm?

From a colleague who is visiting Germany this summer:
The only channel I get in English is CNN so I have been hearing a lot of news. Last night, they were mentioning that Exxon-Mobil shareholders fought off a number of resolutions that appear to have originated with the Rockefeller descendants (NY Times article). One was to "invest more profits in alternative sources of energy." I think this is going to become a classroom teaching tool.

Suppose that it would be less profitable to invest in alternative energy. It may or may not be socially beneficial to do so (it is possible that not all extenalities are internalized). However, some shareholders have a preference for "doing good" while this does not enter into the utility functions of other shareholders. One alternative is for the company to invest more in alternative energy and lower overall profits. Another is for them to maximize profits and distribute the earnings to shareholders who can then invest in alternative energy if they so choose. Which maximizes social welfare? Suppose instead of alternative energy, some have a preference for funding art (which supply may or may not be socially optimal). Does this change the analysis?

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