The Role of Endowments in Academia

Fiscal endowments are taken as foundational to academia. Economists have given us three models to explain endowment performance: institutions rely on endowments as an inter-generational compact that perpetually subsidizes current students with alumni bequests; institutions treat endowments as rainy-day reserves; institutions hoard their wealth. However, economists have been working with inadequate data and measuring the wrong outcomes. To evaluate the role of endowments, we need to use tax records. And the outcome questions previously explored by economists on the size of endowments and payout rates are uninformative in comparison to looking at the percentage of an institution’s total expenditures that are covered by its endowment. Furthermore, we need to see the percentage of endowment payouts that go to scholarships and academic programs. Doing so enables us to build a performance index that will transform our understanding of the role of endowments in US higher education.