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Why did the Dutch East India Co. outperform the British East India Co.? —A theoretical explanation based on the objective of the firm and limited liability—

Author

Listed:
  • Tetsuya Shinkai

    () (School of Economics, Kwansei Gakuin University)

  • Takao Ohkawa

    (Faculty of Economics, Ritsumeikan University)

  • Makoto Okamura

    (Faculty of Economics, Hiroshima University and Ritsumeikan University)

  • Kozo Harimaya

    (Faculty of Business Administration, Ritsumeikan University)

Abstract

We examine the relationship between the objective of a monopolist and limited liability. We establish that the owners of a monopolistic firm are better off to choose profit maximization rather than sales maximization under both unlimited and limited liability. This is consistent with the fact that the Dutch East India Company, whose objective was profit maximization, was better off in the seventeenth century than the British East India Company, whose objective was sales maximization. We also show that a monopolist should choose to organize as a limited liability entity regardless of its objective.

Suggested Citation

  • Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Kozo Harimaya, 2012. "Why did the Dutch East India Co. outperform the British East India Co.? —A theoretical explanation based on the objective of the firm and limited liability—," Discussion Paper Series 96, School of Economics, Kwansei Gakuin University, revised Dec 2012.
  • Handle: RePEc:kgu:wpaper:96
    as

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    File URL: http://192.218.163.163/RePEc/pdf/kgdp96.pdf
    File Function: First version, 2012
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    References listed on IDEAS

    as
    1. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    2. Cleary, Sean & Povel, Paul & Raith, Michael, 2007. "The U-Shaped Investment Curve: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(01), pages 1-39, March.
    3. Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Kozo Harimaya, 2012. "Delegation and Limited Liability in a Modern Capitalistic Economy," Discussion Paper Series 87, School of Economics, Kwansei Gakuin University, revised Apr 2012.
    4. Franck, Bernard & Le Pape, Nicolas, 2008. "The commitment value of the debt: A reappraisal," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 607-615, March.
    5. Povel, Paul & Raith, Michael, 2004. "Financial constraints and product market competition: ex ante vs. ex post incentives," International Journal of Industrial Organization, Elsevier, vol. 22(7), pages 917-949, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    limited liability; firm objective; managerial incentives; monopoly;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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