Endowment Management Based on a Positive Model of the University

Caroline M. Hoxby

Chapter in NBER book How the Financial Crisis and Great Recession Affected Higher Education (2015), Jeffrey R. Brown and Caroline M. Hoxby, editors (p. 15 - 41)
Conference held September 27-28, 2012
Published in December 2014 by University of Chicago Press
© 2015 by the National Bureau of Economic Research

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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Document Object Identifier (DOI): 10.7208/chicago/9780226201979.003.0001

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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