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A Dynamic Equilibrium Model for University Budget Planning

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  • William F. Massy

    (Stanford University)

Abstract

A difference equation model of a university budget system is proposed and analyzed. The conditions for first and second-order dynamic equilibrium are determined, and it is shown that first-order equilibrium provides a useful criterion for financial health. Two sets of first-order solutions are examined: (1) those involving total expenditures, operating income, and the endowment payout rate; and (2) those involving tradeoffs between the net budget increase factor and tuition. The endowment payout rate emerges as a key policy variable that should be set on the basis of budget variables and total return on the endowment, rather than as the result of endowment yield. A region of instability in the solution space is defined; this region should be avoided. Stationary equilibrium, in which the fraction of the budget supported by endowment remains constant over time, simplifies the model and has other desirable properties.

Suggested Citation

  • William F. Massy, 1976. "A Dynamic Equilibrium Model for University Budget Planning," Management Science, INFORMS, vol. 23(3), pages 248-256, November.
    • Handle: RePEc:inm:ormnsc:v:23:y:1976:i:3:p:248-256
    DOI: 10.1287/mnsc.23.3.248
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    Cited by:

    1. Johnes, Jill, 2015. "Operational Research in education," European Journal of Operational Research, Elsevier, vol. 243(3), pages 683-696.

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