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Endowment Management Based on a Positive Model of the University

In: How the Financial Crisis and Great Recession Affected Higher Education

  • Caroline M. Hoxby

I propose a positive model of the university that generates many apparently peculiar features of universities such as endowments and tuition subsidies. The model proposes a specific objective function: a university maximizes its contribution to the intellectual capital of society, valued at social returns. The objective function is enforced within the model-that is, it leads to actions that reinforce the initial selection of the objective function. Endowments also arise naturally within the model: they are a necessary feature of certain universities, not an accident. The model has important implications for the decisions that universities should make on many fronts, but I focus on the implications for financial decisions, especially universities' endowment spending rules and portfolio allocations. The model is designed to explain America's great private research universities and very selective liberal arts colleges and-with modest adaptations-institutions like America's and Britain's great public research universities. Indeed, a ancillary benefit of the model is that it provides a justification for existence of the aforementioned institutions by assigning them a unique role in the creation of the world's intellectual capital.

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This chapter was published in:
  • Jeffrey R. Brown & Caroline M. Hoxby, 2014. "How the Financial Crisis and Great Recession Affected Higher Education," NBER Books, National Bureau of Economic Research, Inc, number brow12-2.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12856.
    Handle: RePEc:nbr:nberch:12856
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. Berglof, Erik, 1994. "A Control Theory of Venture Capital Finance," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 247-67, October.
    2. Kaplan, Steven & Strömberg, Per Johan, 2000. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," CEPR Discussion Papers 2421, C.E.P.R. Discussion Papers.
    3. Brown, Keith C. & Garlappi, Lorenzo & Tiu, Cristian, 2010. "Asset allocation and portfolio performance: Evidence from university endowment funds," Journal of Financial Markets, Elsevier, vol. 13(2), pages 268-294, May.
    4. Jeffrey R. Brown & Stephen G. Dimmock & Scott Weisbenner, 2012. "The Supply of and Demand for Charitable Donations to Higher Education," NBER Working Papers 18389, National Bureau of Economic Research, Inc.
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    7. Trester, Jeffrey J., 1998. "Venture capital contracting under asymmetric information," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 675-699, August.
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    10. Josh Lerner & Antoinette Schoar & Jialan Wang, 2008. "Secrets of the Academy: The Drivers of University Endowment Success," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 207-22, Summer.
    11. Nichols, Donald A, 1974. "The Investment Income Formula of the American Economic Association," American Economic Review, American Economic Association, vol. 64(2), pages 420-26, May.
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    13. Eisner, Robert, 1974. "Endowment Income, Capital Gains and Inflation Accounting: Discussion," American Economic Review, American Economic Association, vol. 64(2), pages 438-41, May.
    14. Jeffrey R. Brown & Stephen G. Dimmock & Jun-Koo Kang & Scott J. Weisbenner, 2014. "How University Endowments Respond to Financial Market Shocks: Evidence and Implications," American Economic Review, American Economic Association, vol. 104(3), pages 931-62, March.
    15. Stephen G. Dimmock, 2012. "Background Risk and University Endowment Funds," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 789-799, August.
    16. Litvack, James M & Malkiel, Burton G & Quandt, Richard E, 1974. "A Plan for the Definition of Endowment Income," American Economic Review, American Economic Association, vol. 64(2), pages 433-37, May.
    17. Hansmann, Henry, 1990. "Why Do Universities Have Endowments?," The Journal of Legal Studies, University of Chicago Press, vol. 19(1), pages 3-42, January.
    18. Gorman, Michael & Sahlman, William A., 1989. "What do venture capitalists do?," Journal of Business Venturing, Elsevier, vol. 4(4), pages 231-248, July.
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    20. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
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