An Integrated Model of University Endowments

Abstract

University endowments differ from other institutions in that donation income and spending rates are of equal importance to asset allocation decisions. Our paper develops an optimal endowment framework with endogenous donations income through a feedback dependence based on investment performance. We investigate both substitution and wealth effects due to incomplete markets and nonlinear donation risk. Looking at empirical data on actual US endowment practices, we validate our donations processes and find that policy asset allocation weights and risky asset investment opportunities explain the cross section of US endowment performance. Large endowments take riskier positions and spending rates are determined by relative investment opportunities and its interaction with endowment size.

Keywords: endowments, asset allocation, spending, donations

JEL Classification: G11, G23