Faculty: Thy administrator's keeper? Some evidence

Colleges and universities face a principal-agent problem. There are information asymmetries over the actions chosen by administrators. Because non-profit constraints limit the financial stake of trustees there may be insufficient monitoring of administrators and, consequentially, shirking. It is conceivable that faculty will serve as “delegated monitors” given the proper incentives. Faculty monitoring will most likely benefit a university when: (1) monitoring costs are low and (2) administrators cannot impose significant punishment costs on faculty. The practices of organized faculty participation in governance and tenure naturally achieve such ends. Empirical evidence from a sample of colleges and universities in the United States supports the hypothesis that features of a faculty's employment have significant effects on a university's financial performance.