Economics at your fingertips  

Responsibility Center Budgeting as a Mechanism to Deal with Academic Moral Hazard

Gordon Myers

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: A Faculty chooses a level of costly effort in generating revenue for the university. The revenue is deployed in the pursuit of academic excellence in research and teaching. The effort is not observable by the central Administration and the amount of revenue generated from given level of effort is uncertain. The Administration and Faculties are assumed risk averse. I show that when effort is observable, or there is no uncertainty, or the Faculty is not risk averse, pure Responsibility Center Budgeting (RCB) is efficient and optimal from the perspective of the Administration. The intuition for this is provided by pure RCB solving the incentive problem and leading to the right effort level by making the Faculty the residual claimant. Once the Faculty is risk averse I show partial RCB is optimal. A problem with pure RCB is that the Faculty holds all the revenue risk. Partial RCB then provides a balance between providing the right incentives to the Faculty and the Administration providing partial insurance to the Faculty. In my simple model I show that we move further away from pure RCB, the more uncertain the environment, the more risk averse the Faculty, and the less risk averse the Administration.

Keywords: University Governance; Decentralization; Responsibility Center Budgeting (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Discussion Papers from Department of Economics, Simon Fraser University Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by Working Paper Coordinator ().

Page updated 2020-04-01
Handle: RePEc:sfu:sfudps:dp18-01