Theoretical Analysis of University Research and Teaching in the Presence of External Research Funding

This paper theoretically investigates how university research and teaching activities interact to generate research output and student enrollment under a setting in which a university earns tuition revenue and obtains external research funding. The main analytical finding is that while research funding can increase both research output and student enrollment when the tuition fee is fixed and university capacity is not fully used ("multiplier effect"), student enrollment is crowded out when a university operates at full capacity ("crowding-out effect"). In particular, this paper shows that when a tuition fee is controlled to maximize tuition revenue, a marginal amount of research funding never positively affect student enrollment due to the emergence of a "binary divide" among universities, namely, multiple equilibria generating a "large university" or a "small college".