A Mechanism for Budgeting Faculty Support Services: Ask the Deans

Faculty support services, such as academic facilities, student services, libraries, and research services, compromise a very significant share of university operating budgets. Incremental-like budgeting continues to be a central component of the budgeting process for these services even for some universities employing Responsibility Center Management (RCM). There are well known incentive problems with incremental budgeting, such as "March Madness." While RCM has been successful in the generation of revenue, there is a rather wide consensus in the literature that RCM has been less successful in managing support service costs. The focus here is to develop a new approach. Critical criteria in budgeting support services should be the costs and the benefits of the service. It is assumed that the service providers know the costs of the faculty support services and the users, the faculties, alone know the benefits. Giving a central role in the determination of support service budgets to Deans is of concern to many central administrators and service providers. There are two primary concerns, replication of services through local provision and an underestimation of benefits due to free riding. It will be shown that these concerns can be warranted. The mechanisms proposed below, however, are such that a rational and self-interested faculty cannot do better than to accurately report its valuation of benefits for the service. It turns out that the right mechanism depends crucially on whether the service is of a private or public nature.