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Budget Uncertainty and Faculty Contracts: A Dynamic Framework for Comparative Analysis

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  • Khovanskaya, Irina
  • Sonin, Konstantin
  • Yudkevich, Maria

Abstract

We study hiring decisions made by competing universities in a dynamic framework, focusing on the structure of university finance. Universities with annual state-approved financing underinvest in high-quality faculty, while universities that receive a significant part of their annual income from returns on endowments hire fewer but better faculty and provide long-term contracts. If university financing is linked to the number of students, there is additional pressure to hire low-quality short-term staff. An increase in the university's budget might force the university to switch its priorities from `research' to `teaching' in equilibrium. We employ our model to discuss the necessity for state-financed endowments, and investigate the political economics of competition between universities, path-dependence in the development of the university system, and higher-education reform in emerging market economies.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6744.

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Date of creation: Mar 2008
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Handle: RePEc:cpr:ceprdp:6744

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Keywords: dynamic game; economics of education; tenure;

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  1. Michael Waldman, 1989. "Up-or-Out Contracts: A Signaling Perspective," UCLA Economics Working Papers 556, UCLA Department of Economics.
  2. VANHAECHT, Eve & PAUWELS, Wilfried, 2005. "University competition: Symmetric or asymmetric quality choices?," Working Papers 2005021, University of Antwerp, Faculty of Applied Economics.
  3. Eric Maskin & Jean Tirole, 1997. "Markov Perfect Equilibrium, I: Observable Actions," Harvard Institute of Economic Research Working Papers 1799, Harvard - Institute of Economic Research.
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  11. De Fraja, Gianni & Iossa, Elisabetta, 2002. "Competition among Universities and the Emergence of the Elite Institution," Bulletin of Economic Research, Wiley Blackwell, vol. 54(3), pages 275-93, July.
  12. Siow, Aloysius, 1998. "Tenure and Other Unusual Personnel Practices in Academia," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(1), pages 152-73, April.
  13. Laura Romero & Elena del Rey, 2004. "Competition Between Public And Private Universities: Quality, Prices And Exams," Economics Working Papers we046423, Universidad Carlos III, Departamento de Economía.
  14. Siow, Aloysius, 1984. "Occupational Choice under Uncertainty," Econometrica, Econometric Society, vol. 52(3), pages 631-45, May.
  15. John Pencavel, 2001. "The Response of Employees to Severance Incentives: The University of California's Faculty, 1991-94," Journal of Human Resources, University of Wisconsin Press, vol. 36(1), pages 58-84.
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