'Optimal Incentives for Income-Generation within Universities'

Abstract

This paper provides a framework with which to model one of the key links between universities and industry -- the undertaking of applied research. We assume that the fundamental objective of universities is to undertake fundamental research and that they receive public funding to do so. Nevertheless, faced with tight budget constraints, universities may have incentives to allow their staff to spend some of their time on income-generating activities such as applied research or consultancy. For this opens up two channels by which universities can ease their budget constraint: (i) by allowing academics to supplement their income, universities will not have to pay such high salaries; (ii) they can effectively tax the income that academics raise through applied research or consultancy -- for example through the imposition "overhead charges". By easing their budget constraint, universities may be able to take on sufficient extra staff that they increase the amount of fundamental research that they can achieve with the given public budget. The paper develops a model of this link between universities and firms and uses it to determine optimal "tax" that universities should impose on applied research income.

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