The Efficiency of Endowments

Abstract

This study argues that endowments can be efficient, both for a finite-lived and infinitely-lived agent. When the lost utility from forgone consumption is less than the discounted utility brought by the cash flows paid throughout the endowment, endowments are utility enhancing. Given that this can be utility enhancing for a finite-lived person, it can also be utility enhancing for an infinitely-lived agent, such as a university. Given the recent political push to force well endowed universities to spend down their endowments, displaying how an endowment’s use can be an efficient is important for policy-makers.