The Management of Universities; Scottish Economic Society/Royal Bank of Scotland Annual Lecture, 1999

This paper surveys the literature concerning the operation of incentive mechanisms within and across higher education institutions. A principal‐agent model of intra‐institution resource allocation is developed, and its implications are compared with some of the resource allocation models currently in operation in British universities. At the inter‐institutional level, the model is adapted to the case where a funding council serves as principal to many agents—the universities. Evidence on the scale and scope economies, and on the technical efficiency of UK universities is presented. It is argued that the received models of resource allocation should be amended so as to encourage the development of the university system in the direction of the sustainable configuration and so as to allow for differences in efficiency across budgetary units.