Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter July 27, 2020

A Choice Model of University Endowments Governance

Xiang Gao, Zhenhua Gu and Zhan Wang


The board of committees governing university endowments often chooses between hiring professionals to run funds and trusting denoting entities with the funds. As usual, sophisticated fund managers can construct a well-diversified investment portfolio; however, their interests may not be aligned with the university. On the other hand, donors have the advantage of assuming full liabilities for losses, but they only have access to risky projects due to their limitations in terms of accessing the available investment universe. This paper develops a theoretical framework in an attempt to explain the distinct endowment management strategy adopted by universities, and particularly their choice of endowment operator identity. Our model can provide supports to the governance activities practiced by university endowments both in developed and developing countries. Furthermore, we show theoretically that current capital control regulations imposed by the developing country's government reduce donations and encourage universities to establish donor-advised endowment funds, in which donors surrender ownership of anything they put in the fund, but retain control over how their money is invested.

JEL Classification: I23; I28

Corresponding author: Zhan Wang, Research Center of Finance, Shanghai Business School, 2271 West Zhong Shan Road, Shanghai, 200235, PR China, E-mail:

Funding source: Chen Guang project of Shanghai Municipal Education Commission

Funding source: Shanghai Education Development Foundation


The authors would like to thank the editor and an anonymous referee for their valuable suggestions. All authors contributed equally.


Andreoni, James. 1989. “Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence.” Journal of Political Economy 97 (6): 1447–58, in Google Scholar

Andreoni, James. 1990. “Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving.” Economic Journal 100 (401): 464–77, in Google Scholar

Andreoni, James. 2018. “The Benefits and Costs of Donor-Advised Funds.” Tax Policy and the Economy 32 (1), in Google Scholar

Brown, Jeffrey R., Stephen Dimmock, Junk-Koo Kang, David Richardson, and Scott, Weisbenner. 2011. The Governance of University Endowments: Insights from a TIAA-CREF Institute Survey, TIAA-CREF Institute Working Paper No. 102.Search in Google Scholar

Brown, Jeffrey R., Stephen G. Dimmock, Jun-Koo Kang, and Scott J. Weisbenner. 2014. “How University Endowments Respond to Financial Market Shocks: Evidence and Implications.” American Economic Review 104 (3): 931–62, in Google Scholar

Gilbert, Thomas, and Christopher Hrdlicka. 2015. “Why Are University Endowments Large and Risky?” Review of Financial Studies 28 (9), 2643–86, in Google Scholar

Kuo, Jenn-Shyong, and Yi-Cheng Ho. 2008. “The Cost Efficiency Impact of the University Operation Fund on Public Universities in Taiwan.” Economics of Education Review 27, 603–12, in Google Scholar

Lerner, Josh, Antoinette Schoar, and Jialan Wnag. 2008. “Secrets of the Academy: The Drivers of University Endowment Success.” Journal of Economic Perspectives 22 (3), 207–22, in Google Scholar

Ma, L., Y. Tang, and J. P. Gómez. 2019. “Portfolio manager compensation in the US mutual fund industry.” The Journal of Finance 74 (2), 587–638, in Google Scholar

Merton, Robert C. 1993. “Optimal Investment Strategies for University Endowment Funds.” In Studies of Supply and Demand in Higher Education. University of Chicago Press.Search in Google Scholar

Tobin, James. 1974. “What is Permanent Endowment Income?” American Economic Review 64 (2): 427–32. in Google Scholar

Townsend, Robert M. 1979. “Optimal Contracts and Competitive Markets with Costly State Verification.” Journal of Economic Theory 21: 265–93, in Google Scholar

Appendix: List of Variables Used in Our Model

FunctionsUtility SpecificationDonoru(xD,xS)=ln(xD)+μln(xS)
Investment ProjectDonorPDF: g(θD); CDF: G(θD)
UniversityPDF: m(θS); CDF: M(θS)
ManagerPDF: h(θP); CDF: H(θP)
VariablesCons. Var.xDDonor's consumption in period 2
xSEndowments received by university in period 2
xFFund manager's consumption in period 2
Utility function parameterμDonor's degree of care for the university
cMonitoring costs expended in period 2
v¯Manager's reserve utility level
κManager's satisfaction from per unit of cons.
Return Var.θDDonor's unit investment outcome in period 2
θSUniversity's unit investment outcome in period 2
θPManager's unit investment outcome in period 2
θTUniversity's contracting payment with manager
dManager's compensation rate in period 2
Signal Var.θ^Threshold of reported returns inducing monitor
θ^v¯Threshold dependable on the reservation utility
θ^cThreshold dependable on the monitoring cost

Received: 2019-09-07
Accepted: 2020-04-09
Published Online: 2020-07-27

© 2020 Walter de Gruyter GmbH, Berlin/Boston