Ülo Ennuste Economics

papers and articles in wordpress

Pekka Ahtiala* has started the dissemination of an ambitious model

“AN ECONOMIC MODEL OF AN AMBITIOUS UNIVERSITY  

 (And Other Similar Non-profit Enterprises)” **

 ******************************************************************************** 

* Prof. Pekka Ahtiala

Department of Economics

33014 University of Tampere Finland

e-mail: pekka.ahtiala@uta.fi

           

 **Abstract

 The paper models the university president’s optimizing problem in his pursuit of excellence, deriving the optimal values of the university’s key policy variables from its “fundamental” objectives and constraints, thereby complementing the management-oriented writings in the literature. Utility in average faculty and average student quality is maximized with respect to faculty size and average faculty expenditures (salary for short), enrollment, average tuition, and supporting services. The budget constraint equates the faculty salary bill and the cost of supporting services with net tuition revenue and grants and donations. Average faculty quality is a function of average faculty salary, average student quality, the faculty-student ratio, and supporting services per capita. Average student quality is a function of average faculty quality, the faculty-student ratio, supporting services per capita, and tuition. Grants and donations are a function of average faculty and student quality, faculty size, and enrollment.

 

It is shown that exogenous changes have multiplier effects on the university’s variables, making it relatively easy to sustain a virtuous circle but very hard to reverse a vicious circle. The multiplier also makes donations worth more to the university than their face value if they help relax the university’s binding budget constraint (normally the operating budget), unlike donations helping to relax a non-binding constraint. Subsidizing students by setting tuition even below the per-student faculty salary bill, net of the marginal donations generated by faculty size, is optimal also in the absence of inter-student externalities. An increase in the sensitivity of faculty quality to salary leads to an increase in optimal faculty size (not salary) and tuition. A decrease in the sensitivity of student quality to tuition leads to an increase in optimal tuition and faculty salaries, and to a decrease in optimal enrollment. An increase in the marginal utility of faculty quality leads to an increase in faculty size and salary, and in that of student quality to a decline in faculty size and salaries, and tuition, and to an increase in enrollment. An increase in the sensitivity of donations to faculty size leads to a matching increase in faculty salaries, and an increase in that to enrollment to a matching cut in tuition, both leading to an increase in supporting services. An increase in the sensitivity of donations to faculty quality leads to an increase in faculty salaries and to a decline in enrollment, and an increase in that to student quality to an increase in enrollment and to a decline in faculty size. The implications of the model for accepting gifts, and for hiring and promotions, are also derived.

 

The model has straightforward applications for nonprofit organizations in general.

 

JEL Classification number: I23, L31

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December 7, 2010 - Posted by | Uncategorized

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