A dynamic stochastic model of corporate behavior over the business cycle with a special application to the major U.S. military airframe builders.

Abstract

This thesis contains a formulation of a dynamic stochastic model of corporate behavior over the business cycle and applies the basic model to forms in the U.S. airframe industry. The literature dealing with the theory of the firm is surveyed and a taxonomy in developed within which the major contributions to the literature are appraised. The basic model is formulated as an optimal control problem. The model is used to study the behavior of the firm over the business cycle and to suggest a possible reconciliation of the traditional and managerial theories of the firm. Financial considerations are incorporated into the model and the relationship between the firm's optimal operating decisions and its optimal financial decisions is examined. Organizational factors are introduced and some of the consequences of decentralized decision-making for the loss of control and X-efficiency are studied. The basic model is extended to the major airframe builders by incorporating factors specific to that industry's institutional milieu. A model of a representative airframe builder is formulated as a stochastic optimal control problem and is used to study the likely impact of making interest expense an allowable cost under government contracts.