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—
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.
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|Date of revision:||Dec 2012|
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