I. Introduction, 25.--II. The basic model, 27.--III. Determination of the level of investment in a mean variance model, 32.--IV. Choice of technique, 47.--V. Remarks on alternative models of market equilibrium, 52.--VI. Concluding remarks, 55.--Appendix, 57.

Raaj K. Sah, Joseph E. Stiglitz; The Quality of Managers in Centralized Versus Decentralized Organizations*, The Quarterly Journal of Economics, Volume 106, Iss

In the field of economics, perhaps the most important break with the past—one that leaves open huge areas for future work—lies in the economics of information. It is now recognized that information is imperfect, obtaining information can be costly, there are important asymmetries of information, and the extent of information asymmetries is affected by actions of firms and individuals. This recognition deeply affects the understanding of wisdom inherited from the past, such as the fundamental welfare theorem and some of the basic characterization of a market economy, and provides explanations of economic and social phenomena that otherwise would be hard to understand.

The recent literature on firm behavior has been characterized by two contrasting strands of analysis: on the one hand, there is the literature attempting to extend the conventional maxims of profit maximization of competitive firms from the familiar static models to dynamic contexts and into situations of uncertainty. These analyses argue that firms should maximize their stock market value and explore the implications of this for firm behavior. On the other hand, there is the vast and growing "managerial" literature, in which other objectives, such as "satisficing," "sales maximizing," and "maximization of the manager's utility functions" are postulated. The second group of analyses criticize the first as being unrealistic, while the first argues that it provides the best "first approximation" to firm behavior: if firms did not maximize their stock market value, or deviated far from value maximization, someone would attempt to take them over, change the course of action of the firm, and make a pure capital gain. This paper presents a unified framework for analyzing firm behavior which can be used to reconcile these divergent views.