NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Endowment Management Based on a Positive Model of the University

Caroline M. Hoxby


This chapter is a preliminary draft unless otherwise noted. It may not have been subjected to the formal review process of the NBER. This page will be updated as the chapter is revised.

Chapter in forthcoming NBER book How the Financial Crisis and Great Recession Affected Higher Education, Jeffrey Brown and Caroline Hoxby, editors
Conference held September 27-28, 2012
Forthcoming from University of Chicago Press

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 makes important predictions for the decisions that universities should make on many fronts if they are behaving in accordance with it, 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. An 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 paper was revised on October 15, 2013

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This chapter first appeared as NBER working paper w18626, Endowment Management Based on a Positive Model of the University, Caroline M. Hoxby
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