Endowment Management Based on a Positive Model of the University
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.
I am grateful to many people with whom I have had discussions that helped me refine ideas on this topic. I am similarly grateful to people who have written previously on this and related topics. These include William Bowen, Jeffrey Brown, Henry Hansmann, and Robert Merton. Eric Bettinger, Keith Brown, David Chambers, Stephen Dimmock, Elroy Dimson, William Goestmann, Bridget Long, Sharon Oster, Christian Tiu, Sarah Turner, and Scott Weisbenner gave me extremely helpful comments on an early outline of this paper. This paper draws very substantially on my 2011 Clarendon Lecture in Economics entitled "The Complex and Increasingly Global Market for Elite Higher Education" which is rewritten in the form of two chapters in the Clarendon Lectures monograph The Role of Markets in Education, Oxford University Press (OUP), under contract. I am grateful for the support of the OUP, especially Adam Swallow. I am solely responsible for the content of this paper.
Caroline M. Hoxby
Caroline Hoxby acknowledges support for her research on higher education from The Bill & Melinda Gates Foundation, the Spencer Foundation for Research Related to Education, The Smith-Richardson Foundation, The Mellon Foundation, and the United States Department of Education Institute for Education Sciences.