Are Universities Fair? Risking the Endowment for Future Generations
38 Pages Posted: 31 Aug 2011 Last revised: 1 Jun 2012
Date Written: September 16, 2011
Abstract
University endowments invest more than 70% of their assets in risky securities. This large allocation to risky assets matches the investment advice provided by standard consumption and portfolio choice models with long-horizon individual investors. But universities are not individuals. In this paper, we analyze the universities' infinite-horizon portfolio choice problem under the paradigm of maintaining intergenerational fairness with a zero rate of time preference. First, we quantify the oft-cited mandate of university trustees to maintain a policy of fairness across generations without any favoritism for the present over the future. Second, we show that the fairer the universities, the less they invest in the risky asset. In the limit, they forego the risky asset completely to provide constant consumption. Third, we explore how if generations are allowed to have differing risk aversions or if universities neglect extreme left-tail return events, then the contradiction between intergenerational fairness and risky asset allocation can be lessened.
Keywords: Endowments, Asset Allocation, Universities, Fairness, Equity, Time Preference
JEL Classification: D81, D91, G11, G12, G23, I22
Suggested Citation: Suggested Citation