NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Endowment Management Based on a Positive Model of the University

Caroline M. Hoxby

NBER Working Paper No. 18626
Issued in December 2012
NBER Program(s):   ED   LS   PE

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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Document Object Identifier (DOI): 10.3386/w18626

Forthcoming: Endowment Management Based on a Positive Model of the University, Caroline M. Hoxby. in How the Financial Crisis and Great Recession Affected Higher Education, Brown and Hoxby. 2014

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