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What Do Shareholders Want? Consumer Welfare and the Objective of the Firm

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  • Keith Marzilli Ericson

Abstract

Shareholders want a firm’s objective function to place some weight on consumer welfare, motivated by both self-interest and altruism. Firms have a unique technology for improving consumer welfare: lowering inefficient price markups. Optimal pricing formulas can account for shareholders’ marginal rate of substitution between profits and consumer welfare. Calibrations show shareholders should place non-trivial weights on consumers. A survey experiment with a representative sample shows how shareholders would vote on resolutions giving strategic guidance to firms. Only 7% would vote for pure profit maximization. The median individual is indifferent between $0.44 in profits or $1 in consumer surplus.

Suggested Citation

  • Keith Marzilli Ericson, 2024. "What Do Shareholders Want? Consumer Welfare and the Objective of the Firm," NBER Working Papers 32064, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32064
    Note: CF EEE IO LE
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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