Quote Of The Day

To enjoy a charitable exemption from taxes, an institution must not only have a purpose deemed worthy (such as promoting education, health, religion, the arts, and so forth), but must also devote all its resources, including income on endowment, to its charitable purpose. The nondistribution constraint is indeed constraining, because it means that the institution cannot raise money in the equity markets. [A non-profit University] can compete with profit-making competitors only if it can attract investment from donors. Generally, this requires that it have many affluent alumni, as they are the principal donors to colleges and universities (partly out of gratitude, partly for the less altruistic reason that they derive prestige from having attended a distinguished institution and they want to help it maintain its distinction). There is a chicken and egg problem. To attract children of well-to-do families, and other children who have good earning prospects, the school has to offer an attractive program, good living and athletic facilities, and a distinguished faculty, but all those things cost money, which is hard for a nonprofit institution to raise unless it already has wealthy alumni. This may be why the very successful nonprofit colleges and universities tend to be quite old. They have had a long time to “grow” alumni who make generous contributions. Brandeis University, founded in the 1940s, is one of the few prominent private universities that is not very old–and it has had great trouble building up an endowment (though in part this is because of the elimination of Jewish quotas at other prominent universities–those quotas were one of the major factors in the decision to create Brandeis)”. —Richard Posner, blogging over at the Becker-Posner blog on For-Profit Colleges and Universities

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