Incentives for benevolence

Like any business, private universities rely on keeping their customers happy

Today, I received an email from the president of the the University of Rochester. I’ll quote some tidbits:

“…the University of Rochester’s endowment investments are estimated to have declined by approximately 25 percent during the [recent market troubles].

In the current circumstances, tuition increases are likely to be smaller than in past years.

I have informed our Board of Trustees that I do not wish to receive a pay increase next academic year.

Separately, the budget for the Office of the President for this academic year already has been reduced by approximately 5 percent.”

It’s a really long letter, discussing the university’s construction plans, potential areas for funding cuts if the market doesn’t recover, areas being targeted for cost savings, so on and so forth. I was really surprised to see it show up in my inbox.

Then I thought about it, and I wasn’t. Private universities have to depend on their students for tuition and alumni for donations. Thus, the majority of the funding of the university depends on keeping everyone as happy as possible, both while they’re at the school and afterwards. This includes spreading warm fuzzy feelings about cutting the president’s salary in hard times.

Conversely, the public university doesn’t rely on students/alumni nearly as much. It’s incentive is to squeeze the government, instead of charging profit-maximizing tuition fees and chasing donations more aggressively. Of course, it may be more prone to encouraging grade inflation and other such things, but it’s tough to argue that as a long-term strategy.

Like any business, private universities rely on keeping their customers happy. In the presence of public universities, that means that some people find them superior than the government product, high tuition fees or not.




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