Wealth for the lazy. (the University Economist).

An alien explorer might stumble upon tiny Oberlin College near Cleveland, Ohio and be astonished by what he sees. The school has a collection of Steinway pianos that is the largest in the world and an art collection that includes masterpieces by Klimt, Matisse, Monet, Rubens, and others. All this is contained in buildings that rival the great palaces of Europe in beauty. And Oberlin's endowment? A healthy $600 million dollars.

An Earthling, however, would not be surprised at all. Indeed, we are accustomed to extraordinary concentrations of wealth at our academic institutions. Harvard University's endowment approaches $20 billion, and ten others have endowments above $4 billion. And forget about mutual-fund accruements: The cash flows into these higher-education funds are awe-inspiring. Fifteen universities have begun capital campaigns with the objective of raising $1 billion or more. Contributions to colleges and universities now make up about 12 percent of total charitable contributions in the U.S.

These facts raise a number of interesting questions. Why is it that individuals voluntarily contribute so much money to these institutions? What are the economic effects of these enormous bequests? And are universities sucking money away from better charitable causes?

Since economists will model the economics of brushing your teeth, it's probably not surprising that they have explored these questions as well. Indeed, studies in this field date back more than 200 years, when Adam Smith first devoted a healthy portion of The Wealth of Nations to the study of the economics of university endowments.

Why do institutions of higher learning acquire such a large share of the charitable pie? People undoubtedly feel a strong sense of loyalty to the schools that started them on their career paths. Successful and wealthy alums, not surprisingly, are often the most loyal of all. Schools also provide a number of worthy social services, such as scholarships to promising low-income students, and perform research that may have a high social value. There is, however, a selfish aspect to the calculation as well. Your alma mater says a lot about you, and its evolution over your lifetime can have a significant impact on your life. If it rises up from mediocrity to become a highly respected academic institution (Boston University comes to mind), you acquire a warm glow that influences everything from cocktail party conversations to job prospects. If the school goes broke and disappears, its alums suffer a powerful loss of status. All of these effects are magnified by a school's clever emphasis on legacy. Not only will you suffer if your alma mater falls back into the pack, but your children will as well.

So the formula is perfect. Contribute money to your alma mater, and you simultaneously help cure cancer, promote social justice, and maximize the odds of increasing your personal prestige. But make no mistake: The prestige effect has real social costs. While education is surely valuable to society, it likely does not make sense to pour tons of money into cancer research institutes in every small town across America. Fundamental cancer research is likely best supported by contributions to charitable organizations that retain experts to steer the money to the most promising research.

The large donations have other costs as well. The main problem was anticipated in 1776 by Smith, who wrote, "The endowments of schools and colleges have necessarily diminished more or less the necessity of application in the teachers." A large endowment creates a moat around the university that shields it from criticism by the rest of society. The protected and cloistered environment ...