DP6744 Budget Uncertainty and Faculty Contracts: A Dynamic Framework for Comparative Analysis

Author(s): Irina Khovanskaya, Konstantin Sonin, Maria Yudkevich
Publication Date: March 2008
Keyword(s): dynamic game, economics of education, tenure
JEL(s): C73, I20
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6744

We study hiring decisions made by competing universities in a dynamic framework, focusing on the structure of university finance. Universities with annual state-approved financing underinvest in high-quality faculty, while universities that receive a significant part of their annual income from returns on endowments hire fewer but better faculty and provide long-term contracts. If university financing is linked to the number of students, there is additional pressure to hire low-quality short-term staff. An increase in the university's budget might force the university to switch its priorities from `research' to `teaching' in equilibrium. We employ our model to discuss the necessity for state-financed endowments, and investigate the political economics of competition between universities, path-dependence in the development of the university system, and higher-education reform in emerging market economies.