University endowment shocks and resource allocation

According to theory, precautionary savings are accumulated to smooth consumption against income shocks. Households largely conform to this theory, which is best seen by considering that the marginal propensity to consume is quite lower than one. Universities, at least American ones, have endowments that could be used for the same purpose and often have. But the story is quite different when it is the endowment that gets a negative hit, instead of income.

Jeffrey Brown, Stephen G. Dimmock, Jun-Koo Kang and Scott Weisbenner find that universities usually reduce their operational expenses in situations like the current crisis. And according to theory, this makes perfect sense, as their permanent income has dropped. What is interesting is that different type of universities react differently. Support staff always get reduced, but not administrators. Sigh. In top universities, cut-backs are concentrated on student financial aid, in the other ones cuts fall mostly on tenured and tenure-track faculty, trying to substitute them with adjuncts. And, interestingly, when peers suffer heavier endowment losses, universities increase hiring, as it looks like they try to poach on the competition.