Endowment spending rates, intergenerational equity and the sources of capital gains

This paper analyzes how James Tobin’s widely cited concept of “intergenerational equity” for university endowments relates to the economic concepts of intertemporal substitutability and risk aversion. I show that Tobin’s concept of intergenerational equity is a very special case of intertemporal substitutability; a special case that implies very low tolerance for risk. Using the more general case, I show that the observed reduction in university spending rates during the 1990s can be viewed as a reasonable response to a period of non-recurring capital gains.