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

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Author Info
Khovanskaya, Irina
Sonin, Konstantin
Yudkevich, Maria

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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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Related research
Keywords: dynamic game; economics of education; tenure;

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Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
I20 - Health, Education, and Welfare - - Education - - - General

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  4. Michael S. McPherson & Morton Owen Schapiro, 1999. "Tenure Issues in Higher Education," Journal of Economic Perspectives, American Economic Association, vol. 13(1), pages 85-98, Winter. [Downloadable!] (restricted)
  5. Smith Freeman, 1977. "Wage Trends as Performance Displays Productive Potential: A Model and Application to Academic Early Retirement," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 419-443, Autumn. [Downloadable!] (restricted)
  6. 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.
  7. Vanhaecht E. & Pauwels W., 2005. "University competition: Symmetric or asymmetric quality choices?," Working Papers 2005021, University of Antwerp, Faculty of Applied Economics. [Downloadable!]
  8. Carmichael, H Lorne, 1988. "Incentives in Academics: Why Is There Tenure?," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 453-72, June. [Downloadable!] (restricted)
  9. Waldman, Michael, 1990. "Up-or-Out Contracts: A Signaling Perspective," Journal of Labor Economics, University of Chicago Press, vol. 8(2), pages 230-50, April. [Downloadable!] (restricted)
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  10. Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, vol. 100(2), pages 191-219, October. [Downloadable!] (restricted)
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