The Economics of Higher Purpose

50 Pages Posted: 3 Dec 2013 Last revised: 5 Dec 2013

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Robert E. Quinn

University of Michigan, Stephen M. Ross School of Business

Date Written: December 2, 2013

Abstract

We develop a theory of how the intersection of business goals and the pursuit of "higher purpose" — something that produces a non-pecuniary social benefit valued by the principal and the agent — affects economic outcomes. Two types of principals — those pursuing only wealth maximization and those pursuing both wealth and a higher purpose — are considered. These are typically viewed as competing approaches to running organizations. However, the theory we develop, which shows that the pursuit of higher-purpose projects reduces labor costs and increases capital investments, highlights a potential complementarity between the principals pursuing a higher purpose and those exclusively pursuing wealth. The complementarity arises because the pursuit of higher-purpose projects by others can relax budget constraints for wealth-maximizing principals, and the presence of purely-wealth-maximizing principals may be essential for the higher-purpose-pursuing principals to obtain external financing. The absence of either type of principal may lead to a market breakdown involving no projects being undertaken.

Keywords: Higher purpose, budget constraints, wealth maximization

JEL Classification: Q01, Q32, Z1

Suggested Citation

Thakor, Anjan V. and Quinn, Robert E., The Economics of Higher Purpose (December 2, 2013). ECGI - Finance Working Paper No. 395/2013. Available at SSRN: https://ssrn.com/abstract=2362454 or http://dx.doi.org/10.2139/ssrn.2362454

Anjan V. Thakor (Contact Author)

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Robert E. Quinn

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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