A Dynamic Equilibrium Model for University Budget Planning

William F. Massy
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William F. Massy: Stanford University

Management Science, 1976, vol. 23, issue 3, 248-256

Abstract: A difference equation model of a university budget system is proposed and analyzed. The conditions for first and second-order dynamic equilibrium are determined, and it is shown that first-order equilibrium provides a useful criterion for financial health. Two sets of first-order solutions are examined: (1) those involving total expenditures, operating income, and the endowment payout rate; and (2) those involving tradeoffs between the net budget increase factor and tuition. The endowment payout rate emerges as a key policy variable that should be set on the basis of budget variables and total return on the endowment, rather than as the result of endowment yield. A region of instability in the solution space is defined; this region should be avoided. Stationary equilibrium, in which the fraction of the budget supported by endowment remains constant over time, simplifies the model and has other desirable properties.

Date: 1976
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:23:y:1976:i:3:p:248-256

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