Endowment Shocks and Charitable Donations to Higher Education

In the year after a university experiences a negative shock equal to 10 percent of its annual operating budget, donors increase giving by 1 percent.

Educational institutions are the second largest recipients of charitable donations in the United States. In The Supply of and Demand for Charitable Donations to Higher Education (NBER Working Paper No. 18389), Jeffrey Brown, Stephen Dimmock, and Scott Weisbenner estimate that in the 2008-9 academic year about $12 billion in capital gifts -- money for long-run goals such as increasing endowments, supporting new construction, or endowing professorships -- was donated to universities, with another $13 billion donated as current-use gifts that could be used to defray operating costs. They find that these two kinds of donations respond differently to changing economic conditions, a factor that is "important for universities to consider when planning and managing financial risks."

The authors determine that when macroeconomic conditions change, they create two partially offsetting effects on university endowments. First, because donors are often affected by the same "macroeconomic shock" as the endowment, their charitable contributions are correlated with general economic activity. So, for example, a 10 percent decrease in the average income in a university's home state coincides with a 5.2 percent decrease in donations to the university. A 10 percent decrease in home values in that state translates into a 1.3 percent decrease in donations. A 10 percent decrease in the stock returns of in-state companies is associated with a 0.7 percent decrease in donations.

Helping to partially mitigate this effect on university endowments, though, is the fact that donors respond to university needs. Controlling for donors' resources, in the year after a university experiences a "negative endowment shock" -- a change in endowment income relative to university operating costs -- equal to 10 percent of its annual operating budget, donors increase giving by 1 percent. The authors' estimates suggest that donations remain steady following positive endowment shocks.

For this analysis, the authors combine data from multiple sources covering 1997-2009 and containing information on U.S. university characteristics, finances, and endowments, as well as state-by-state housing prices, incomes, and the return on the portfolio of stocks of companies headquartered in each state. The average university in their sample had operating costs of $288.6 million a year and an average endowment of $451.9 million. Average annual donations were $31.2 million, about 15 percent of costs.

--Linda Gorman