Private University Businesses

PandaMatt
PandaMatt
Aug 23, 2017 · 5 min read

I know very little about the economics of universities.


Okay, with that out of the way, I have become increasingly intrigued by large private universities (Uni’s) as businesses rather than schools. First, Uni’s can be broken down into what I call primary assets (students, graduate students, and faculty), secondary assets (all forms of land and buildings that are utilized by primary assets), and objectives (additions to the academic literature and production of reputable members of the workforce including leaders, innovators, and academics).

As any business, Uni’s need to acquire capital in order to pay for their primary and secondary assets. However, unlike other businesses, I get the feeling that Uni’s do not grow at rates comparable to publicly traded companies. This is understandable, given that the metrics for growth are so radically different. I am not even sure if endowments grow at rates comparable to gross margins year over year.

There are really two possible realities: Uni’s grow their endowment indefinitely and invest small amounts each year, generally capping the size of their primary and secondary assets, or they reinvest their money (reducing the growth of their endowment) and growing their assets. Most universities definitely spend money renovating existing properties, and making some hires, but I want to push for the maximal expansion of assets without compromising on objectives.

The limiting factor in primary asset growth is the acquisition of teaching and research faculty, which is bounded by either the size of the talent pool in the world, or bounded by the size of the secondary assets. Interestingly, the solution to either bound is simply to produce the most appealing infrastructure in the form of advanced research facilities and offices, attractive intellectual property rules, and resources to conduct research. The resources to conduct research comes in several forms, which will be given separate attention. If faculty from other universities find one institution more attractive than another, then over time the faculty of the attractive university will grow to some upper limit (I’m assuming no university has reached such a limit).

With more faculty come the ability to house more graduate students, and the ability to offer more classes without increasing the student:professor ratio. With this in mind, the probability of achieving the objective per year has increased; the potential magnitude of that achievement has also increased.

We have reached the following: Uni’s should grow their secondary assets as quickly as possible in order to further their objective.

The growth of the secondary assets is limited by either physical space or by capital. with regards to the former, space can be acquired monetarily from the surrounding area (the purchase of small businesses, apartment complexes etc), and also by expanding vertically. With regards to the latter, a massive increase in capital can come from several sources, but I will introduce the claim that Uni’s should consider acquiring (or creating) off-site manufactures of research materials. Although this may initially require large investments, overtime, this manufacturer could service all faculty and graduate students (limiting the dependency on scarce national funding), and also sell products at competitive prices to other universities or small companies in the research industry. As another way to think about this, the number of primary assets becomes useless if only a small fraction can have the funds or materials necessary to produce anything. By increasing access to materials independently from national funding, the percentage of productive students will increase and the objectives will be achieved.

Some may say that Uni’s buying small business’s space and taking away apartment complexes will be detrimental to the community. I disagree. A Uni can buy the land and increase the size and capacity of the existing business of apartment complex. For example, take a portion of a street with 5 restaurants and some apartment complexes across from them. By buying the land, the university could add more apartments by increasing the height of the building, and also provide more space for the restaurants. The added apartments could be used for affordable student housing (another source of revenue) and also for the general public. By increasing the population of the area in form of primary assets at least, the local businesses may increase their revenues as well.

The concern for gentrification is a real concern, and a moral issue that needs addressing. If the university raises the price of rent after buying the land, and the local businesses raise their price for goods, then gentrification will happen. If I was a moral university, I would control the rent of my land, and do whatever I can to keep the average living cost the same. There is another component of gentrification: the change of culture. This is also a real concern. I would address this by talking with leaders of the community or individual community members, about the culture they want to preserve.

Gentrification can occur by another means: other companies buying land and offering goods and services of relatively high cost. This will incentivize landlords to raise their prices. In areas where land is not so limited, this is hard to prevent unless the university will buy a majority of the surrounding land. In more tight places, this is less of a concern, and can be overcome by the acquisition of land and controlling rent.


The other variable that limits the growth of secondary assets is capital, after all, Uni’s need to pay salaries. The primary source of income for Uni’s is either philanthropy from alum and generous narcissists (small joke) or tuition from students. I will assume that several students’ tuition is sufficient to fund one professor. If this is the case, a simultaneous investment in professors will allow the Uni to increase class size, and thereby fund hires.

But through other means, I believe Uni’s should add to their business model royalties for products and subscriptions to services. These products could either be in the form of intellectual property, patents for scientific techniques, online classes for the general public, scientific materials and equipment, rent from the general public, and access to university facilities to the general public. Obviously this a short list, but I believe that optimization of even several of these could lead to large gains in capital. Indirectly, by increasing the size of primary assets, one increases the probability of long term philanthropic investments from alumni, but this is a side note.


The above outlines how universities should increase their secondary and therefore primary assets with the aim of bettering the general objective of higher education. The only question that I have that I cannot address is: why do most universities not expand as rapidly as possible?

I will leave you with a final and interesting question: What if universities offered stock?

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